RingCentral Inc (RNG) 2016 Q2 法說會逐字稿

Greetings and welcome to the RingCentral second quarter 2016 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 second quarter 2016 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 purpose of our call today is to provide you with information on our second quarter performance as well as to provide you our financial outlook for the third quarter and full-year 2016. Some of our discussions and responses to your questions may contain forward-looking statements. These will include statements on our expected financial results for the third quarter and full year 2016 and our expected annual revenues several years out.

In addition these will include our future plans, prospects and opportunities, trends in the business communications market and our expectations regarding our expansion internationally and up market. We'll also be making forward-looking statements about our competitive position ; our relationships with carrier and channel partners; the expected benefits of our investments into technology; the RingCentral platform and open APIs; our products including Glip, contact center, RingCentral rooms and room connector and our global office solution; our new phone distribution model and our growth strategies; current and future and 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; success of our marketing, sales and retention efforts; and customer demand for and 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 www.IR.RingCentral.com to access our earnings release and slide presentation, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral.

For forward-looking guidance a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail on our Investor Relations website. With that, let me turn the call over to Vlad.

Thank you, Darren. Q2 was another outstanding quarter with strong top line growth and continued margin expansion. Our RingCentral office is now an almost $300 million annual recurrent revenue business growing over 40% year-over-year and representing over 95% of our net new business in Q2.

With over $360 million in total ARR and 33% growth year-over-year, we remain the largest and fastest growing pure play, cloud, UCaaS provider, and we expect this momentum to continue. We aim to grow our annual revenue to $1 billion in the next four to five years. We believe we are well positioned to achieve this goal. Here is why. One, this market is large and underpenetrated giving us a long run rate to continue to grow at a high rate.

Two, our rapid pace of innovation allows us to maintain a technology lead over the competition resulting in the bigger share of this market. Three, our expanding indirect channel network enables us to keep scaling rapidly and efficiently to sustain our high growth rate even on expanding revenue base. To give you a bit more color I'd like to share some thoughts with you on each of these points. First, the market. The overall total addressable market remains a huge underpenetrated opportunity.

We estimate this opportunity to be over $50 billion in just replacing legacy systems that support only voice. This is not counting the adjacencies of team collaboration, media and web conferencing and contact center as a service all of which areas we participate in with very strong results to show. We do a lot more than replace PBXs and light up desk top phones.

As further validation of the market acceleration to the cloud we have recently seen legacy vendors change their marketing to amplify messaging around the cloud. However, practically speaking we rarely run into their cloud solutions in the market today. As a matter of fact, the market is not nearly as crowded or competitive as it may seem.

There are actually only a few UCaaS providers in the market that are operating, scaled up, multitenant, global cloud platforms. Of these, we're the largest and fastest growing. Perhaps part of the reason is that it is actually hard to do what we do. Table stakes for regular SaaS companies are an innovative product, an efficient go to market model and strong customer care.

We do all of that well. But also as a UCaaS platform provider we have the added burden of delivering high quality of voice communications and no scheduled down time for upgrades. We have developed, operated, scaled and hardened our proprietary platform over the last decade with a rapidly growing base of hundreds of thousands of customers to show for it. The legacy long term vendors have a long way to go in terms of delivering a competitive cloud solution.

And without relentless investments in innovations and operational excellence, the moat will get only wider. Consider the innovations we have delivered in the market over the past year alone. We have substantially expanded the capabilities of our flagship product RingCentral Office. Specifically, we launched RingCentral connect platform along with a number of key SaaS integrations. We added Glip team messaging and collaboration, enhanced our media and web conferencing and released RingCentral contact center.

We recently launched RingCentral global office to serve the needs of multi-national enterprises. And finally we announced the launch of RingCentral rooms and room connector enabling our customers to bring a high definition video experience at a fraction of the cost of legacy hard wire in-room systems. Here are a few more details. We're currently the only UCaaS provider offering team messaging and collaboration who also integrated with cloud-based business communications.

Glip was a key capability that helped us beat out competition in two large contracts with value of more than $500,000. In total, 13 up market deals with an average size of over 200 users cited Glip as a key reason for their decision to choose RingCentral. For example, we won a 200-user deployment at Hawk Ridge Systems, an engineering design company.

They wanted to augment their traditional voice communications with innovative multi-modal key messaging that is offered by Glip. We also won a 300-user opportunity at ALE Solutions, a temporary housing solution provider where Glip's capability to message partners and insurance companies was more appealing than those features offered by our competitors. We are similarly leading the charge with our open platform initiative, RingCentral connect.

RingCentral connect platform allows customers to leverage RingCentral business communications capabilities into key business processes. We now have nearly 40 out of the box ISV integrations. In addition, the RingCentral platform open APIs offer developers a set of tools and services to build integrations to design custom work flows.

The new custom integrations nearly doubled quarter-over-quarter to about 100 creating long term stickiness for our solutions. In Q2 Columbia University, teachers college, leveraged our APIs to create an emergency automated SMS notification system that alerts the college administration and locate the user if they dialed 911 from any campus phone. RingCentral Connect platform is also key in our ability to provide more value to our customers by integrating with key products from partners like Microsoft and Google.

Specifically in Q2, we released integration to Microsoft outlook adding to our preexisting integration with Microsoft Office 365. We recently won a 130-office-user deal and 15 contact center users at Quantros, healthcare software to service solution provider. Quantros chose RingCentral Office and contact center as we were able to closely integrate it with their Microsoft Office 365 solution. Another key initiative for us is global office, a very important growth driver and key differentiator in the enterprise segment. Legacy systems have to be physically deployed at every location and supported by local telephone carriers making it an administrative and cost nightmare. RingCentral global office solves this pain points by deploying a single solution on the worldwide basis.

Even though we launched this fairly recently, we have already seen over 200 multi-national businesses adopt global office up from over 100 in Q1. In Q2 global office was a key capability that helped us win 1,000 users at Box, a leading enterprise content management platform. With employees and offices dispersed worldwide, Box required a solution that consolidated its entire global enterprise communications in the cloud and offered the agility to grow on demand.

We can similarly tie other major customer wins to our recent technology enhancements. For example, in Q2 we announced our cloud contact center offering integrated with RingCentral office helped us win 150 contact center users and 100 office users at Brightway Insurance. With nearly 300,000 business policies written, Brightway has a distributed workforce in over 100 countries and contact center needs across the globe. By selecting RingCentral they are now seeing an increase in customer satisfaction better communication within their organization and faster response times.

Unique capabilities like Glip, global office, RingCenter platform and contact center are not only enabling us to deliver a leading growth rate but are also translating to our continued success up market. ROI for customers with 50 to 1,000 employees continues to be the best across all our direct selling segments. This allows us to continue expanding up market resulting in high quality revenues with attractive returns.

This also gives us extra confidence in our enterprise segment, namely, customers with over 1,000 users. We believe this segment will follow a similar growth path, and we're positioning ourself accordingly. We have brought on new key members of the executive team to champion sales and support for large enterprises including a new CMO, VP of enterprise sales, VP of customer success, and head of professional services.

Together they bring over 50 years of experience selling to and supporting large enterprise clients. We also announced the certified delivery partner program to scale our professional services for the up market. This relentless focus on up market expansion resulted in the recent win at Santa Clara unified school district. With over 1700 users, the district was looking for a cloud solution to address their mobility needs, improve quality of service, and provide enhanced administrative capabilities.

We are deploying 1700 users across 25 locations in just 45 days. Deals like Santa Clara and many others have resulted in our 50-plus user segment bookings now comprising about 40% of our total office bookings. This is up from about 35% last quarter and 20% in Q2 a year ago. Despite the meaningfully higher bookings mix from last year, ARR growth from this segment was once again over 100% for the ninth consecutive quarter.

In Q2 we saw two new seven-figure total contract value deals as well as have several additional such opportunities in the pipeline. It is important to note that while the up market is of key strategic value to us we are by no means looking to abandon the sub 50 user segment. While our ARR from the 50-plus user segment more than doubled year-over-year, our ARR from the office sub 50 segment still grew at a very healthy clip up approximately 30%.

This segment has great sales and marketing efficiency with our world class lead generation engine. It also helps grow our brand recognition as well as drive our land and expand model. As a true scaled up multi-tenant UCaaS platform provider addressing multiple business segments we are able to cost effectively apply innovation driven by needs of our up market customers to small businesses and vice versa.

But of course a technology edge alone, while necessary, is not by itself sufficient. Key to sustaining high growth rate is our ability to scale our sales force rapidly and cost effectively. The key to this is our expanding indirect channel network. In Q2 the indirect channel had a record quarter contributing about 25% of revenues, up from 20% a year ago.

With AT&T, BT and TELUS, we remain the only pure play software as a service business communications company with multiple major carriers reselling our solutions. In the quarter we saw a nice up sell from a carrier partner that deployed an additional 500 users to an existing enterprise retailer that already had over 1,000 users. One of our partners, TELUS, is gaining momentum and helped deliver an over 190 user win with AV Max a Canadian aviation product and service provider.

The customer was looking to unite six offices and their highly mobile work force within a single communications platform. And another account signed a year ago through a carrier partner with an initial contact for only about 60 users added an additional 1400 users in Q2 taking its overall deployment to over 4,000 users. We also continue to rapidly scale our channel partners.

In Q2 we added six new master resellers for added access to nearly 12,000 new sub agents. This channel is already paying handsome dividends for us. For example, in Q2 it brought us an over 1,000 user win with World Vision, one of the largest non-profit humanitarian aid development and advocacy organization that was looking for an integrated solution with an emphasis on mobility and global reach for the way the organization operates.

Supplementing our carrier and channel partners and further leveraging the RingCentral platform in Q2 we announced joining forces with Google. Our new RingCentral for Google apps edition compliments the Google app suite to allow businesses to position all their business productivity needs to the cloud. We are optimistic that this new addition will drive a strong value proposition for users as our previous Google integration has been well received with thousands of customers currently using them.

For example, in Q2 we saw a 750 user win at home loan provider Cardinal Financial that was referred to us by Google. Our Google integration is also starting to emerge as a key differentiator especially in the education vertical where Google apps already has an important footprint. Our integration with Google was also key with a recent win at Santa Clara school districts. Carrier partners and strategic partnerships like Google provide us with an efficient way to extend the reach of our sales force and acquire new customers.

In the future we will continue to expand both our direct and indirect channels thus allowing us to maintain our industry-leading growth trajectory. In summary, our goal is to get to $1 billion in revenues in four to five years. We're addressing a $50 billion plus market that are still dominated by legacy players and is ripe for disruption. We're one of the very few scaled up UCaaS providers in the space that have built and are operating its own platform.

Of this, we're the largest and fastest growing with a strong and expanding technology lead and a very strong diversified GTM strategy. The market is there to allow for high growth rate for many years to come. I am more optimistic and excited about the opportunity ahead of us than ever before. And with that I'll turn the call over to Clyde.

Thank you, Vlad. Good afternoon, everyone. Before I begin, I 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. We had another great quarter exceeding the high end of our revenue guidance.

Q2 was underscored by 34% software subscription revenue growth year-over-year along with strong non-GAAP results including software subscription gross margins of 80%, operating margins of 1.9%, and earnings per share up $0.02. In addition, we reported our second consecutive quarter of free cash flow generation.

All in all, we continue to see strong traction with our growth drivers and solid momentum with our expansion up market. Total annualized exit monthly recurrent subscriptions, or ARR, grew to approximately $364 million, up 33% year-over-year and 7% sequentially. The ARR for RingCentral office grew to approximately $292 million up 42% year-over-year and 8% sequentially.

Customer satisfaction remained healthy in Q2 with over all net monthly subscription dollar retention over 99%. Office net monthly subscription dollar retention was once again over 100% as it is common for customers to adopt RingCentral Office in part of their organization and increase their footprint over time particularly with up market customers.

In fact, during Q2 about 40% of our new Office business came from existing customers. Our cohort analysis indicates that we are getting higher up sell from new customers as we expand up market. This demonstrates the stickiness of the RingCentral platform and the opportunity we have to land and expand deployments with customers. Software subscription revenue was $86.1 million up 34% year-over-year and 8% sequentially.

Once again, we had a record quarter in our indirect channel which contributed about 25% of revenues. Total revenue for the first quarter was $91.8 million. This was above our guidance of $86.5 million to $88.5 million. I am happy to announce that a transition of our phone sales to the agency model was completed in Q2 and the reported results during the quarter reflect the completion of that transition.

I would note that we have chosen not to transition our carrier partner's phone sales to the agency model as the billing relationships to these customers are through the carrier. Relative to our guidance, this change contributed an incremental $700,000 of other revenues. For comparative purposes we have provided our historical results on an apples to apples basis with this change, and reconciliations are available in our IR deck on press release.

On a comparative basis, total revenues grew 34% year-over-year and 8% sequentially. Before I move further down the income statement I want to remind you that my commentary will be focussed on non-GAAP results on guidance. A reconciliation of all GAAP to non-GAAP results is provided with our earnings press release issued earlier today and in the slide deck on our IR website.

Our software subscription gross margin sustained its 80% level in Q2. This was consistent with Q1 and represents about a five-point improvement year-over-year. Our continued margin expansion further demonstrates the leverage from our multi-tenant SaaS model. This 80% gross margin achievement, which includes transport costs places us at the high end of best in class SaaS payers.

Gross margin from other revenues was 28% in the quarter. Our other revenues line includes commissions under the agency model, professional services, and revenues from rental and carrier sales of phones. Total gross margin was 77% up 4 [points] (corrected by company after the call) year-over-year and consistent with Q1. Sales and marketing expenses were about $43 million for the quarter, or 47% of revenues.

Down from 48% a year ago and up from 46% last quarter as we continue to invest in growth given our model's attractive unit economics. For each dollar invested in sales and marketing, we now see $8 of revenue and about $6 of gross contribution profit, up from $5 previously over the projected life of an Office customer, given the strides we have made with our margin improvement.

R&D expenses were $15 million in the second quarter or 16% of revenues, consistent with Q2 a year ago and up from 15% last quarter. G&A expenses were about $11 million in Q2 or 12% of revenues, down one point from the year ago period and down two points sequentially. We had an operating profit of $1.7 million for an operating margin of 1.9%, which is at the high end of our guidance range of 1% to 2%.

This is an improvement of approximately seven points from the second quarter a year ago, and up 40 basis points from last quarter. Net income improved to $1.5 million, compared to a net loss of $4 million in Q2 of last year and $1 million profit last quarter. Earnings per share was $0.02 at the high end of our Q2 guidance range of break even to $0.02. Share count was 76 million fully diluted shares.

On a GAAP basis Q2 net loss was $7.8 million or a loss of $0.11 per share. The difference between our GAAP and non-GAAP results is $9.3 million or $0.13 per share. Of this, $0.10 was driven by stock-based compensation, $0.02 was due to the currency remeasurement of our intercompany balances in the UK and penny was driven by the combination of amortization of intangibles and other items related to the Glip acquisition.

We ended Q2 with cash and short-term investments of $148 million, compared to $139 million at the end of Q1. Deferred revenue was $42 million as of June 30 an increase from $39 million in Q1 and $31 million a year ago. For the quarter, cash flow from operations was a positive $9.9 million, compared to $4.8 million for Q1 and $1.1 million for the same period a year ago. The increases in Q2 was due to improved working capital from the transition to the agency model and catch-up payments from our carrier partners.

Free cash flow was $5.3 million in Q2 making it our second consecutive quarter of free cash flow generation. Moving to our outlook for the third quarter and full-year 2016. For the third quarter we expect total revenue of $95 million to $97 million which represents growth of 28% to 30% on a comparative basis with 2015 results adjusted to include the carriers under the direct sales model.

We expect non-GAAP operating margin of 1% to 2%. This should lead to non-GAAP earnings per share of $0.01 plus or minus a penny, based on 78 million weighted average fully diluted shares. For the full-year 2016 we are raising our total revenue guidance to $370 million to $375 million up from our previous guidance of $359 million to $367 million.

Adjusting for the change in the phone agency model this implies a year-over-year growth of 29% to 31%. We are also raising the low end of our outlook for operating margin to a range of 1.5% to 2%, up from 1% to 2% we provided last quarter. This should lead to pro forma earnings per share of $0.04 to $0.08 up from $0.03 to $0.07 previously. We expect weighted average fully diluted shares to be $77 million.

We expect free cash flow for the year of approximately $9 million to $12 million. In conclusion, we continue to invest in our leadership position and have no intention of letting the competition catch up. We feel confidently enough to introduce a $1 billion revenue target achievable in the next four to five years with slight improvements in operating margins as we address all segments of this large market with good unit economics.

With a large market opportunity in front of us, we are excited about our current performance and expect the momentum to continue into the future. With that, I'll turn the call over to the operator for Q&A.

(Operator instructions)

John DiFucci, Jefferies.

Thank you. I have a question for Vlad and then a follow-up for Clyde. Vlad, just I want to make sure we understood your comments on the up market in your prepared remarks and in the slides it said it was your strongest sub market quarter. Were you talking about revenue, ARR, or are you talking about new business signed?

And if you are not talked about new business signed can you talk about that tell us a little bit about that and how you would characterize the new business signed in the up market for this quarter?

Yes, hi, John. Very good question. So as a matter of fact, it is about both. So firstly, it is about the fact that on a long-term basis if you look at the ROI or efficiency of our spend in the up market, that is now our best segment. And it used to be that small business, which we define to be under 50 employees, would be somewhat more efficient for us to acquire and retain those customers on a lifetime value basis, but that has now switched.

This actually gives us tremendous confidence that we will be able to further accelerate our up market penetration and establish a very, very strong position in both the mid-market, which we define to be under 1,000 employees, as well as true enterprise with 1,000 plus. And as you see in the global share the fact that we're growing nicely there including several deals with over seven digits in lifetime value.

Okay. Great. And, Clyde, if I could, this is as you pointed out the second consecutive quarter of you point out positive free cash flow but also characterize that as just very strong cash flow. Can you give us a little more detail around the benefit you received in this quarter from the change in accrued liabilities?

The change in accrued liabilities I think you're referring to the transition to the phone light model. In the first half of this year, let's just do it that way, because the transition in Q1, you're looking at $3 million to $4 million benefit from that transition. On an ongoing basis, if you look at our guidance, we should generate $1 million to $2 million a quarter on sustained basis of free cash flow.

We are confident from here on in we'll be free cash flow positive. We did get some benefits from the business model transition in the first half. Obviously that is not going to repeat, but we expect to be free cash flow positive for the year and likely going forward.

Great. That's very helpful. Thanks a lot, guys.

Bhavan Suri, William Blair.

Hey, guys, thanks for taking my questions, great job there. Just a follow up to John's question, Vlad, you've talked about up market, and I just want to just get some sense here, because we always want to compare to one of your competitors, 8 by 8, you guys disclosed 50-plus customers, and they disclose 1,000-plus metrics. Help us understand how we reconcile those two, how we view that given your continued move up obviously the numbers you're delivering.

Sure. Hi, Bhavan. In fairness, we will look at our business the way we look at our business which is define small to be under 50 seats and mid-50 to 1,000 and then enterprise thousand plus. We do have folks out there with different measures. I think one of our competitors is talking more in terms of a $1,000 MRR per customer.

Look, I mean, we did some of the back of the envelope calculations here. So firstly if you look at our 50 seats that actually translates in excess of $1500 MRR, versus their $1,000. If we were to though just for apples to apples, you know, look at sort of the way look at it with 1,000-plus, then and I think they're talking about -- they're talking about the 1,000-plus in the channel.

So for us a comparable metric would be over 70% of new bookings would fall into that category.

That's helpful. 70% would fall into north of1,000-plus.

And the channel. And the channel, just staying with apples to apples. Frankly, maybe more importantly than this, is the fact that up market for us, the way that we define it which is much more conservative, of course, again $1500-plus MRR versus $1,000, that continues to grow for us in triple digits, and if I have it right, it is ninth quarter in the row.

We are extremely proud of this. And as I just mentioned in my previous answer to John, the size of this segment overall is now more profitable to us on a long-term basis gives us ability to continue investment and to continue taking market share, in this very, very important segment.

That is very helpful. Quick follow up. You talk about partners and put out this $1 billion four to five-year target. Can you help us understand what that mix partners versus non-partners would look like four to five years out and what investments need to be made on the partner side to get there? Thank you.

Let me take maybe to the first part of it. So, look, obviously it is a little bit hard to predict the specifics four to five years out, but I really do want to reiterate that partners, or indirect channel, for us is of critical importance. It really does give us a way to scale up extremely cost efficiently and gets us into some very interesting deals.

I already mentioned in my prepared remarks we now have a customer with over 4,000 seats that was brought to us by one of the carrier partners and they started out as a 50 or 60 seat customer to begin with. To be clear, we are growing both our direct and indirect capabilities.

I mentioned that we have substantially revamped our go to market. We have very, very strong additions to our team new CMO, new head of enterprise, new head of prof services, just to name a few. So we're clearly investing in this area. But channels are also very, very important.

Look, as a case in point one of our very nice wins last quarter was Santa Clara school district, and that is, what, 1700 users already. And that comes through the channel. So we feel that both of them will grow.

I love to be in this type of a race. Let's see who wins. One way or another we should feel confident that four to five years we're talking $1 billion plus in revenues. And we'll be looking on to the next milestone by then.

Our next question comes from the line of George Sutton, Craig-Hallum. Please proceed with your question.

Thank you. Hello, guys. Nice results. So I found the $1 billion view very interesting, and I wondered if you could just give us a sense of how you thought about presenting that today. Obviously the IRR on that would be 22% to 28%, depending upon if it is four to five years, and I'm curious if you're looking at that as purely organic.

We haven't -- I'll take that -- we haven't said whether it's organic or not. There are no -- so we have no comment whether it is organic or not. But to your point before, about your implied growth rates, we have been growing 30% or better over the last three years. You can draw your own conclusions whether we need to be -- do that organically or not, but we are not making any statements whether it is organic or inorganic.

But to be clear -- I completely of course agree with what Clyde said, but, look, we are not saying that we are in these numbers that we're not saying look we're going to go and do a major acquisition. I'm not saying we're not going to do a major acquisition, but in our calculations and in our decision to now start talking about this type of a milestone, we have not factored in us acquiring revenue.

Of course, as you know, we've had one acquisition so far already which is a technology acquisition. I would not rule out that we would have more let's call them tuck ins -- technology tuck ins as we grow. We fully expect to leverage these types of new technologies to our advantage.

As you know, our Glip acquisition has been extremely successful. We have several major accounts to show for it including Columbia University, including Box and a few others. It's -- so we'll see more of the same. But, again, no major acquisitions baked in, in the $1 billion target.

And just to be clear, I love the message of laying out the $1 billion. As a follow-up on the Google relationship, I found it very interesting you're already seeing opportunities brought to you through that relationship. Can you just give us a little better sense on what the opportunity is specifically with that relationship?

Sure. So, look, at the high level there are it is very clear that many, most, and I would think eventually all businesses, will migrate to the cloud. They will migrate all of the vertical IT functions to the cloud and number of major companies have emerged sales force, net suite, recently acquired for a nice value, a whole number of others, workday, yes?

So all of this stuff is moving to the cloud. Communications is moving to the cloud. As you know, we are leading that charge. But business productivity software itself is moving to the cloud.

Of course, Microsoft itself has been with our Office 365. Google apps, which is doing, you know, pretty well in the market, as you know, and basically make long story short, if you take Google apps and you combine with RingCentral Office, then you do have a full [operativity] suite that is ready to use today and we already have customers jointly where cooperating on the go to market strategy. We were one of the very few partners as they've announced with their first joint GTM initiative, I believe that was in Q1, and we are already seeing some wins together. So we are hoping that there is going to be more to come. But again at a very high level it does seem to be quite synergistic between what they have to bring and what we have.

Mike Latimore, Northland Capital Markets.

Thanks a lot. Excellent quarter there, guys. On the other revenue line, should we assume that there is going to be a sort of stable range there over time, or is that going to grow a little bit? Just trying to figure out what that means for the other revenue line?

Thanks, Mike. This is Clyde. I'll take that. With the transition to the new model it should stabilize, but what's in there includes prof services, commissions from the agency model. So as the business grow, that would grow, especially as you go up market. As you go up market, pro services will grow, the commission revenue should grow. The way to think about it is growth in line with the subscription revenue.

Got it. Okay. And then just curious on the contact center application, how is demand for that in the quarter?

Well, we haven't broken out those numbers separately, yet, but we're seeing continual strong demand, we have mentioned a few specific wins. It is an important part of the portfolio. You do have businesses that want to unify their, you know, communications in the cloud, as well as with the cloud contact center. And we feel we have a very compelling offering out there.

Nikolay Beliov, Bank of America.

Hi, thank you for taking my questions and congratulations on nice performance in the quarter. My first question is around the $1 billion target. How do you envision domestic versus international split. Now we have international revenues that are beginning to grow but still minimal. Secondly, how close do you think you're going to be or at the operating margin target the [lowsmo] operating margin target you laid out during the IPO?

Let me take the first part, and then we'll let Clyde address the margins question. Look, on domestic versus international, those are the same, hard to predict the specifics four years out. But what I do want to reiterate, we have been extremely successful with our global office approach, and what this allows us is to address international businesses in a cost effective manner.

So what global office is just as a quick recap, is we are going after US, UK and Canadian companies, who are headquartered in these regions but have international presence. And we are able to provide full native fully [hamalogated] in-country support and presentation to those employees who are international, while combining everything under a single invoice and also offering very seamless intracompany presentation to those employee bases.

So this has been great for us. It has been very much instrumental in a number of wins, Box is a prime example just recently where we're being employed internationally and we would not have had that account without very strong international presence. So we definitely are going to continue with this.

As far as in-country presence is concerned, I'm sure it will come. But frankly US headquartered, UK, headquarter count-- companies, is just a huge -- such a huge portion of global GDP we think there is a very long run rate there. Please do not read this as, no, we are not going to expand beyond global office.

We are planning to, we will. Remember, what we are able to achieve with global office infrastructurewise translates and leverages exactly 100% towards full international in-country presence. Clyde, you should take the margin.

Nikolai, the question on margins, depends on our growth rate at the time. Is it high growth rate or moderate growth rate? So that is point number one. As you know very well, margin is a function of investment in sales and marketing to grow, which is your classic SaaS model and we are in a classic SaaS model now.

So our gross margin is at the high end of our original target rate we referred to back before the IPO. So we have achieved the high end of that range. We are in the range in R&D, G&A has probably got a point or two to improve. So it really comes down to a function of growth rate and of sales and marketing investment.

So if five years from now or the $1 billion, when we get there four to five years, we see the same opportunity we see today, and of course we will communicate with investors and get feedback from investors. But if the opportunity is there, if the unit economics is there, then it likely makes sense for us to continue that.

But we are committed to the long term targets of 20% to 25%. The question is, at what growth rate and at what opportunity are we going after?

Terry Tillman, Raymond James.

Good afternoon, gentlemen. I guess I would say, wow. Great quarter. Lot of my questions have been answered, but I guess, Clyde, maybe a question for you in terms of cash flow.

It was strong and actually a lot of follow through in the full year guidance on the cash flow. What I'm curious though in the second quarter, you did say benefits from cash collections from carriers. Maybe you could quantify that and how much of the strength in our cash flow or outlook is based on some sort of positive shift to annual prepayment?

Couple of things. Under the carrier piece of it it is more timing and literally these things whether it's on March 31 or April, it was about $1 million to $2 million was the benefits from carriers. As to the benefit on prepaid, our prepaid went up from $31 million to $39 million. Not a meaningful amount.

That a year-over-year amount. We'll see that improvement over time. That is a function, Terry, as we move up the larger of customers. You will see more and more deferred revenue on the balance sheet which of course helps the cash flow. So that will be a tail wind for us as we go forward. I would say we expect that to continue to improve, as you've seen it improve over the last year.

But Clyde, in terms of the full-year update on free cash flow, is there anything in there that speaks of a major step-up in how much you get from a customer for 12 months up front? Or is there really nothing baked in that speaks of a big step-up?

No, in terms of the forecast for the year, I think we explained the first half and earlier I think a question from John we talked about some of the one-time benefits we got. But then in ongoing basis, no, there is no assumption of a specific step-up. This is an ongoing basis, as we see it today, we probably generate $1 million to $2 million of free cash flow a quarter, maybe a little bit better than that.

Barry McCarver, Stevens.

Hey, guys, this is Will, for Barry. Congratulations on a good quarter. Most of my questions have been answered, so I'll just be brief. Given some of the peers in the space, focussed on the middle market, have been involved in some M&A activity, have you gotten any feedback from your channel partners and seen any uptick in business maybe from some concern there?

Look, I mean, yes, there have been some activity in the space and also remember we are in multiple spaces here. We were, yes, we started out as a UCaaS and leading that segment. But we do more than just voice as I already mentioned. So but the question how do I say it? Numbers speak for themselves. Our customers and our partners seem to be pretty happy with our product mix as it exists now.

We are clearly taking our fair share, some people say more than our fair share. It just speaks to the strength of the technology that we have. We own and have developed and are operating most of it ourselves but not 100%.

And whatever it is that is not ours has been very well integrated and is riding on our infrastructure and so forth if I understand the question. So we feel we're in the right -- in a pretty good position here.

Thanks, guys.

Brian Schwartz, Oppenheimer.

Thanks for taking my question today and congratulations on a very strong quarter. Most of my questions have been asked, too. But I wanted to ask you something that hasn't been asked today, and it is an area in a category that you're not in today, but it seems very adjacent to what you're doing and certainly gathering a lot of attention in the market and investment community, and that is embedded communications in applications.

And I just wanted to get your take how you could be thinking about that opportunity and that category in the future, and if that's maybe a category that you could either build or acquire or even use your open platform and your ecosystem to partner with and just because it is gathering so much attention these days on the street, just wondering how you guys are thinking about the opportunity in the embedded communications and applications category? Thanks.

Yes, look, thank you for noting that we do have an open platform. We do have a readily growing ecosystem. As you know, our approach is a little bit different in that we make our platform and our APIs available to our customers and partners.

And it is more along the lines of, let's say, sales forces app exchange. So we think it is a good model. So I would say that technologywise we're there. If you're a customer of ours you can very much embed communications into your work flows and make them actionable.

A great example is Columbia recently, utilized our platform to automate in a very critical task of handling 911 identifications. So certainly our platform is well capable of providing those types of capabilities. As far as the rest of it, future will tell. We like the sort of predictable recurrent revenue nature of our business.

We've mentioned several times I think over time how much of next quarter's revenue is really already on the books and spoken for, by the end of every quarter. And we like that and we don't want to chase shiny objects necessarily or unnecessarily. But having said that, we are keeping our eyes open and as this market develops and matures we'll see what happens.

But, again, for now we're happy where we are with our connect initiative which just to reiterate is to the best of our understanding is ahead of any direct competitor who is also in the recurrent revenue UCaaS business.

Jonathan Kees, Summit Redstone.

All right. Thanks for taking my question. I'll start with the follow-up. In the past you've talked about AT&T and being a 10% customer. I didn't hear that. Were they a 10% customer? I notice you talked about TELUS and BT and some of the carrier sales that have taken place. Was AT&T a 10% customer and if so, what was it?

Clyde, do you want to take that?

The question, I'm sorry could you repeat the question.

I'm sorry. Was AT&T a 10% customer and if so, what was it?

The last that we -- under confidential agreement with AT&T we disclose these once a year as of our 10-K it was 13%.

Okay. All right. Okay. So you're not worried -- no concerns or no major shifts in terms of your AT&T activities?

Look, AT&T has been a strong general partner of ours for if I remember right around five years, maybe over five years. So we are seeing continuous strong performance from the channel overall and from carriers as part of that channel. We're just not in a position to report on any specific carrier customer in the quarterly basis, but I will, again, reiterate numbers speak for themselves and obviously they have been quite a bit of-- I don't know -- announcements and whatever in the field. You can look at our growth and look at the fact that we are beating our guidance and raising our guidance at this points.

Jonathan, I would just add our carrier, our overall revenue from carriers grew in the quarter. That is as close as we can give you.

We have time for one last question. The last question comes from the line of Meta Marshall with Morgan Stanley.

Thanks, guys. I just wanted to kind of follow up on the carrier point and get a sense of you added a lot of indirect partners over the last year and specifically the last quarter. And just get a sense if you think that kind of indirect channel partners outside of Telco will end up being ultimately the biggest driver of indirect growth, or whether you still think telcos will be a healthy driver of growth.

And following up on that, you had said in the past that it would take a kind of similar amount of time to ramp BT and TELUS to be as successful as AT&T have been and I want to get a sense of early feedback on that as to whether it will still take a multi-year process to get those to be meaningful customers, or how do you think about that? Thanks.

Let us start in reverse. Look, so first, they're absolutely all meaningful customers. They're all fantastic brands. We're very fortunate to have three major carriers reselling RingCentral. No other UCaaS provider has any, frankly. So we're good. So having said that, yes, it will take time.

That is the nature of the current revenue business. So we'll stick with that story, and you also got to remember that AT&T is meaningfully larger, certainly than TELUS, and we are also growing quite rapidly and just like Clyde's comments is we have very, very strong confidentiality agreement and restrictions with each of these partners.

So we report as we are obligated to at the 10% threshold, but I'd like to point out that given our $1 billion target 10% is $100 million. So we feel that we have numerous vectors to get there, carriers being very important. But certainly by no means the only one, and the channel will work, and we'll get there with the combination of all of these.

Got it. Thank you.

Thank you.

There are no further questions. I'd like to hand the call back to management for closing comments.

Sure. Thank you. Look, firstly thank you all for your time for calling in. I would just like to reiterate we had a very strong quarter and, yes, we've had industry-leading performance and growth for quite some time now.

But what really gives us additional spring in our step is the fact that our up market continues to develop, continues to grow extremely well. Now we are clearly outselling competition across the board in multiple segments including up market itself. We do expect this momentum to continue.

And really I'd like to maybe end on this point, that in the end great companies are made of great people. I'm sure you've heard that before. But in our case we had a pretty good team, but now we have truly a world class team with our recent hires.

I would imagine that some of you will have a chance to meet many of them in the foreseeable future. And we feel very, very strong about our ability to get to this $1 billion mark and break through and move forward.

So thank you for taking an interest in our Company and onward and upwards, as they say.

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.

Thank you.