RingCentral Inc (RNG) 2016 Q4 法說會逐字稿

Greetings, and welcome to the RingCentral fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce 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 2016 earnings conference call. I'm Darren Yip, RingCentral's Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; David Sipes, Chief Operating Officer; and Clyde Hosein, Chief Financial Officer. Our format today will include prepared remarks by Vlad, David, and Clyde, followed by Q&A.

The purpose of our call today is to provide you with information on our fourth-quarter and full-year 2016 performance, as well as to provide our financial outlook for the first quarter and full year 2017. 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 first quarter and full year of 2017 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 op market and our success in the enterprise segment.

We'll also be making forward-looking statements about our competitive position; our relationships with our carrier, channel, and strategic partners; the expected benefits of our investments in technology; our open platform and integrations; our products, including Glip and Contact Center and our Global Office solution; 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 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 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 certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available, as discussed in detail in our investor relations website. For your convenience, copies of our script are available on our website. With that, let me turn the call over to Vlad.

Thank you, Darren. We had a great quarter ending a great year. Businesses are moving their communications to the cloud, and we're winning that war. We're the largest and fastest-growing pure-play cloud provider in the space, and we have also been named a Gartner Magic Quadrant leader for two years in a row. Our success is rooted in our clear technical and product leadership.

Our solution combines world-class cloud business communications, world-class team messaging collaboration, world-class cloud Contact Center, and world-class video conferencing, all supported by a robust global footprint. We're also the only solution in our space to provide all of these capabilities with an open platform. Based on this solid foundation, we were able to scale up our midmarket and enterprise go-to market efforts in a cost-efficient and meaningful manner. This has allowed us to build a significant midmarket and enterprise business very quickly.

It is now an over $100 million business in its own right, and it's growing at over 90% year over year. For comparison purposes, this is better than 2 times the growth rate of our nearest competitor in a similar segment and similar-sized business. Here are some of our major achievements from last year.

We grew total revenue by 32% year over year. We ended the year at $400 million recurring revenue run rate. We have also been free cash flow positive every quarter in 2016. On the innovation side, we delivered in five key areas. One, we integrated the Glip messaging and collaboration into our core RingCentral Office product. At this point, we offer the industry's only integrated cloud communications and collaboration solution. In Q4 alone, Glip capabilities helped drive nearly 40 op market wins.

Two, we deployed Global Office in over 30 countries. We now have over 600 customers on Global Office. Three, we expanded our open platform and our ISV Partner ecosystem. We now have over 50 ISV Partner integrations in nearly 500 custom work flow integrations running on our platform.

Four, we added more advanced tools reporting and support capabilities to our Contact Center. Five, we launched RingCentral Rooms and Room Connector. These cloud-based room video conferencing solutions help organizations overcome the pain points of complex, difficult to use, and costly fixed-infrastructure systems associated with traditional telepresence-type setups.

We also observed two major changes in the market. First, increased acceptance of UCaaS by midmarket and enterprise customers. These customers are increasingly switching to cloud communications and collaboration solutions from legacy on-premise systems. This momentum is increasing as leading legacy on-premise vendors have started facing financial challenges. We believe the speed at which our product and go-to-market teams have evolved their capabilities to deliver against this massive opportunity in this segment is unparalleled.

And second, partner channels increasingly focusing on selling cloud solutions in place of legacy on-premise communication systems. This is in response to the requirements of the large customers to meet the needs of their increasingly mobile industry workforces. To that end, we added 20 key master agents in 2016, which represent over 10,000 individual partners representing approximately 30,000 feet on the street. In summary, our strategy of providing a complete global, open communications and collaboration solution to the midmarket and enterprise is paying off handsomely.

In Q4, we closed five seven-figure TCV deals. All of these wins leveraged multiple elements of our open platform. With our complete communications and collaboration suite, we are able to routinely replace multiple legacy providers. This is not limited to just traditional PBF providers like Cisco and Avaya, which we replaced regularly, but also include WebEx, Slack, Avaya Contact Center, and Five9 and their respective competitors.

In 2017 we expect to double down on all of our innovation vectors as well as aggressive expansion of our partner channel and direct sales teams for the midmarket and enterprise segments. With our momentum and the very large underpenetrated market, I feel confident that we will be a $1 billion revenue company by the end of 2020. Now, I will pass it over to our COO, Dave Sipes, to give you some additional color on our progress.

Thank you, Vlad. Q4 was a strong finish to a strong year. The strong performance was driven by our success in the midmarket and enterprise segments. As Vlad mentioned, we are winning because of the unique capabilities of our integrated suite that is displacing multiple vendors in our key wins and competitive takeaways.

Glip continues to gain traction in the market and is a key winning differentiator for us in numerous deals. For example, we won a three-year deal at Genex, a leader in integrated managed care services, that included 2500 Office and about 100 Contact Center users, where we replaced an on-premise legacy Cisco system and prevailed against other cloud competitors. We won because of Glip's unique team messaging capabilities, our HIPAA security, and power of our open platform as well as our seamless integration with Contact Center.

Also, last quarter we talked about an 1800-user takeaway from a cloud competitor at a leading specialty construction company. This quarter I'm happy to reveal the customer is Structural Group, who also signed a three-year contract. Structural is now deployed and will be part of our enterprise Customer Hero marketing campaign that has been running in Fortune and Forbes. Glip team messaging and collaboration integration with the RingCentral Office was a critical factor in this key win.

We continue to see positive results from our investments in Global Office. In Q4 we saw a 50% increase in Global Office accounts quarter-over-quarter, now totaling over 600. This includes a 1700-user win at Aptean, a leading provider of industry-focused enterprise software solutions, who also signed a three-year contract. Aptean was built on numerous acquisitions and wanted a single, globally-unified communications platform to save cost and gain efficiency. They are replacing 20 on-premise legacy systems across their global enterprise, and 350 of the 1700 users are international. We expect our Global Office capabilities continue to be a significant growth vector for us in 2017 and beyond.

Our open platform, along with our large ecosystem of partners, has also been a critical advantage in winning in the midmarket and enterprise segments. This enables customers to seamlessly integrate business communications logic into their enterprise applications. For example, Advanced Diabetic Solutions launched Prescription Valet, an online service for ordering medications and medical supplies. Working with our SDK to integrate with RingCentral SMS service, the company will be providing prescription refill reminders via text.

We are also seeing an increased demand for our integrated Contact Center solution in the midmarket and enterprise. As Vlad mentioned, in Q4 Contact Center saw another record quarter. Of the five seven-figure deals in the quarter, two were driven by our integrated Contact Center. When paired with RingCentral Office, RingCentral Contact Center offers a complete and innovative solution that seamlessly connects all enterprise employees. This allows enterprises to increase and improve engagement with our customers.

For example, at Sungevity, a solar electricity company, we started with 500 Office users and recently expanded into more than 130 Contact Center seats. We won this upsell due to our capability to deliver the seamless, integrated experience I just mentioned. Sungevity is also a good illustration of a land-and-expand opportunity. Our ability to get our foot in the door and expand deployment across midmarket and enterprise customers and employees is creating meaningful tailwinds as we penetrate these segments. Our proven ability to delight the customer once getting in has lead to a meaningful expansion opportunities, which creates tailwinds for quarters to come.

In Q4, we have already seen 40% of our new business coming from existing customers, and this is just the beginning. For example, with our top 20 accounts, our initial deployments have reached only 15-20% of the total opportunity that we see with these accounts. Our [march-up] market has been super-charged by significant traction and improving brand preference with channel partners. As you recall, last quarter we signed a 5,000-user deal that was lead by a channel partner, and we continued to build on that momentum this quarter. This quarter, our channel partners saw a 32% increase in new business sequentially quarter over quarter and contributed about a third of total new business. For example, three of the top five seven-figure deals came through the channel.

In Q4 we also saw meaningful contributions from our strategic partners. During the quarter we signed two UK Google partners, Cloud Technology Solutions and [Kinesco]. Shortly after signing Kinesco, they helped us win at Dennis Publishing, one of the leading independently-owned media companies in the UK. We are replacing their legacy Siemens infrastructure with our Office product for 350 users. Dennis Publishing wanted a solution that was integrated with Google G-Suite and that enables their modern mobile workforce.

We also won an 850-user opportunity at Carvana, an online car dealer that was identified through our relationship with Okta. Okta has been a fantastic partner, as our products are very complimentary -- enables RingCentral customers to easily integrate to Active Directory. Carvana was experiencing rapid growth, with new locations added every month. Once again, we replaced legacy on-premise systems at their headquarters and branch offices. The key capabilities we brought to bear were our tight integrations with Okta and Active Directory, Contact Center, and a rich feature set.

Our carrier partners also contributed to our enterprise wins. In Q4 a North American carrier partner helped us win an initial 2300 users, scaling up to 10,000 users at a national fast food restaurant chain. With an initial multi-million dollar contract, it is one of the largest wins our carriers have brought us, with plenty of upside for land-and-expand. Our increasing recognition as a midmarket and enterprise cloud leader, aided by financial difficulties of legacy vendors, has resulted in a robust quadrupling of our enterprise pipeline from the prior year, including dozens of 10,000-plus user opportunities.

In summary, we feel very good about the growth vectors and catalysts for 2017 and beyond, with the traction we are seeing with even larger customers and an increasing momentum we are experiencing with our channel partners. I will now hand it over to our CFO, Clyde Hosein.

Good afternoon to everyone. Before I begin, I want to remind you that my commentary will be focused on non-GAAP results on guidance. Unless otherwise indicated, all measures that follow are non-GAAP, with year-over-year comparisons adjusted to the agency model. A reconciliation of all GAAP to non-GAAP results was provided with our earnings press release issued earlier today and in the slide deck on our IR website.

Q4 was another solid quarter concluding a great year for RingCentral. In the fourth quarter we delivered revenue growth above the high end of our guidance range while driving continued year-over-year improvements in both our gross and operating margins. This includes a record revenues of $105 million. This is a significant milestone for us, as we crossed the $100 million quarterly revenue mark for the first time.

We also improved our software subscription gross margin to 81%. As a reminder, our gross margin includes customer support costs, making us amongst the highest in our space and amongst the best [companies]. Very importantly, we saw strong momentum in our midmarket and enterprise execution. To that end, our midmarket and enterprise segments, which are now a $100 million business, grew 93% and made up 49% of our new Office bookings.

Now turning to some of the detail. For Q4, total annualized exit monthly recurring subscriptions, or ARR, grew to approximately $414 million, up 31% year over year and 6% sequentially. The ARR for RingCentral Office grew to approximately $342 million, up 38% year over year and 8% sequentially.

RingCentral Office annualized net monthly subscription dollar retention was over 100% across the install base. In Q4, about 40% of our new Office business came from existing customers. We believe this not only demonstrates satisfaction with the RingCentral platform but also the tailwinds from land-and-expand with our larger customers.

Software subscription revenue in Q4 was $98 million, up 28% year over year and 7% sequentially. The indirect channel contributed over 25% of revenues in Q4. Other revenue was $7 million, bringing total revenue for the fourth quarter to $105 million, above our outlook of $102 million to $104 million. Total revenue grew 29% year over year.

Our software subscription gross margin reached an all-time high of 81% in Q4 and represents a 250 basis point improvement year over year, again demonstrating the leverage from a multi-tenant model. Gross margin from other revenues was 20% in the quarter. Total gross margin was 77%, up about 2 points year over year and 50 basis points higher than Q3. Sales and marketing and expenses were $51 million for the quarter or 49% of revenue. This is up from 45% in fourth quarter a year ago and consistent with last quarter, as we continue to invest in midmarket and enterprise.

Our unit economics continued to improve. As we laid out at our Investor Day in November, for each dollar invested in sales and marketing, we now see $9 of revenue and $7 of contribution gross profit over the projected life of an Office customer. This was up from $8 of revenue and about $6 of gross profit previously. As a reminder, our midmarket and enterprise customer segments generate $12 and $15 of cumulative lifetime revenue for each dollar invested in sales and marketing respectively.

R&D expenses were $15 million in the fourth quarter or 15% of revenues, down from 16% in Q4 a year ago and up 1 point from last quarter. We remain committed to investing in innovation to widen the gap of our industry-leading product relative to our competitors. G&A expenses were about $12 million in Q4 or 11% of revenues, down from 13% in the year-ago period and 12% last quarter.

Our operating profit was $2.2 million for an operating margin of 2.1%. This is an improvement of approximately 110 basis points from the fourth-quarter a year ago. Net income improved to $2 million compared to $500,000 in Q4 of last year and consistent with last quarter. Earnings per share was $0.03. Share count was 78 million fully diluted shares.

On a GAAP basis, our Q4 net loss was $7 million or a loss of $0.09 per share. The difference between our GAAP and non-GAAP results was $9 million or $0.12 per share. Of this, $0.11 was driven by stock-based compensation while $0.01 was due to the combination of currency re-measurement of our intercompany balances as well as amortization of intangibles and other items related to our Glip acquisition.

We ended Q4 with cash and cash equivalents of $160 million, compared to $152 million at the end of Q3 and $138 million a year ago. Deferred revenue was $45 million as of December 31, an increase from $43 million in Q3 and $37 million a year ago. Although not reflected on the December 31 balance sheet, I would note that as of last week, we've paid off the remaining balance of our debt. For the quarter, cash flow from operations was $7 million compared to $8 million for Q3 and $3 million in the same period a year ago. Free cash flow was $2 million in Q4, marking four consecutive quarters of positive free cash flow generation in 2016.

Moving on to full-year 2016. Our software subscription revenue grew 31% year over year to $356 million, driven by RingCentral Office. Total revenue grew to $378 million or 32% year over year. Our indirect channel is super charging our midmarket and enterprise growth.

Indirect contributed over 25% of our ARR in 2016, up from over 20% in 2015, driven by the strong performance in our reseller channel. AT&T represented 14% of our total revenue. As a reminder, we provide this disclosure on an annual basis.

For the year, software subscription gross margin was 80%, up 4 points from last year. Total gross margin was 77%, up about 4 points from last year as well. We substantially improved non-GAAP operating margin, over 4 points from negative 2.4% in 2015 to positive 2.0% for the full year 2016. We also made significant improvements in cash flow from operations, increasing from $5 million in 2015 to $30 million in 2016. Capital expenditure in 2016 was $16 million or roughly 4% of revenue, driven mostly by our Global Office deployment. We generated free cash flow in every quarter of 2016 for a total of $13 million, up from $12 million use of cash in 2015.

Before turning to 2017, I want to update you on a couple metrics that help illustrate the traction we are experiencing with our business today. First, we are doing a greater number of longer term contracts, with 76% of new Office bookings in 2016 opting for annual or multi-year agreements, up from 65% in 2015. Second, the annualized gross dollar churn rate for Office was 10.7% in 2016, a 6% improvement compared to 2015. Overall retention continues to improve as we provide more value to our customers and expand our offerings to larger enterprises. In addition, for midmarket and enterprise office customers, the gross churn continued to be less than half of the overall Office rate.

Before turning to our outlook, I wanted to go over an operational model change in 2017. Last year, RingCentral had transitioned its hardware sales from a direct sales model to an agency model. However, not all of our customers & partners could be moved to the agency model for contractual and user experience reasons.

This dual structure created an unnecessary administrative burden for a minimal portion of our revenue. To simplify things, we have decided to revert back to the direct sales model for the hardware business. As we mentioned at the analyst day, we will be refining the metrics we provide you in 2017 to give you better transparency into how we manage the Company.

Now for our outlook. For the full year 2017, we expect software subscription revenue of $447 million to $454 million, which represents annual growth of 27%, plus or minus a point. We expect total revenue of $484 million to $492 million, which implies year-over-year growth of 27% to 30%. On a comparative basis, adjusted to the direct sales model, growth would be three points lower.

Given our transition to the direct hardware sales model, we expect a 2 point headwind to overall gross margins year-over-year in 2017 and for Q1. There is no impact to subscription gross margin. We expect non-GAAP operating margin of 2.5% to 3%, up from 2% in 2016. We expect non-GAAP earnings per share of $0.13 to $0.17. We expect weighted average fully diluted shares to be 80 million. We expect free cash flow for the year of approximately $5 million to $10 million, which includes a $9 million headwind from the transition to the direct sales model.

The difference between our 2017 GAAP and non-GAAP EPS is expected to be approximately $0.55, including $0.53 of stock-based compensation and $0.02 of amortization of intangibles and other items related to the Glip acquisition. This excludes any effects of currency re-measurement, which is difficult to forecast.

For the first quarter, we expect software subscription revenue of $102 million to $103 million, which represents annual growth of 28% to 29%. We expect total revenue of $110.5 million, plus or minus $1 million, which represents annual growth of 27% to 29%. On a comparative basis adjusted to the direct sales model, growth would have been 2 points lower.

We expect non-GAAP operating margin of 1.8% to 2.2%. We expect a non-GAAP earnings per share of $0.02, plus or minus $0.01, based on 79 million weighted average fully diluted shares. As a reminder, we typically see a sequential headwind in Q1 relative to Q4 due to normal seasonal effects, such as employee taxes, of about 1 to 2 points. We expect free cash flow to be breakeven, excluding approximately $5 million of one-time impact of working capital from reversing the agency model.

The difference between our Q1 GAAP and non-GAAP EPS is expected to be approximately $0.12, including $0.11 of stock-based compensation and $0.01 of amortization of intangibles and other items related to the Glip acquisition. This excludes any effects of currency re-measurement, which is difficult to forecast. In closing, we had a terrific year, are forecasting a very strong 2017, and we are well-positioned to deliver $1 billion in revenues by the end of 2020. With that, I'll turn the call over to the operator for Q&A.

Thank you.

(Operator Instructions)

Our first question comes from the line of Nikolay Beliov with Bank of America. Please proceed with your question.

Hello, thanks for taking my question, and congratulations on a nice performance. Vlad, wanted to ask you about the midmarket and the enterprise, wanted to dig a little bit deeper.

Can you please give us the top reasons why you're winning in the midmarket and the enterprise? Is it the product, is it this year, et cetera, and the reasons why you don't win? And in that context, what is the setup for the salesforce to address the midmarket and the enterprise market in 2017 and the growth of the core carriers you guys are projecting here for 2017?

Nikolay, thank you for the congrats. We do feel we had a very good quarter capping a very, very nice year.

To your question -- so as you know, I do come from a product background, so I will put product first. I believe that fundamentally our success is rooted in our deep commitment to innovation, the fact that we are seriously investing and out-spending all of our competition, and also a lot of it is focus, is the fact that attention of the Management team, attention of our go-to-market leadership is really very much now in the midmarket and enterprise.

Midmarket and enterprise for us is now a $100 million revenue business. That's quite significant, and it's also growing at over 90%, 93% last quarter year-over-year. As far as some of the go-to-market specifics, maybe Dave can address that.

What we see in the midmarket and enterprise segments, we are seeing an increased propensity from the customers in wanting to move to cloud solutions and the superiority of the cloud solutions and delivering the open platform, the global capability, and, in the case of RingCentral, the combination of enterprise, communication and collaboration.

And those are the reasons we see why we win in the market. We see accounts like Structural, which was very focused on having that integration of collaboration and communication. And we're seeing greater propensity also in the channel of picking up core cloud solutions like RingCentral as the customers are demanding that.

Thank you.

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

Hello, good afternoon, gentlemen. This is Jason on for George. So obviously, you're seeing a lot of success moving on market. You're doing over $100 million in midmarket and enterprise now, and then you gave the growth context there. But you'd also mentioned you're seeing a quadrupling of the pipeline since the beginning of the year, so just wondering if you can give some context on what you're seeing as far as sales and implementation cycles -- if you're seeing that shorten a little bit, or what's the time frame to recognizing revenue from these channels?

On the enterprise segment is where we stated the pipeline is quadrupled. We see several accounts that can come into our pipeline in quarter and closing quarter, as we mentioned with our 5,000-user account last quarter, and there's been several this quarter also.

And we see that more as there's a propensity to move to cloud as well as a disfavor of staying with legacy solutions and financial instability of some of those providers. So we have seen that acceleration in the midmarket historically. It's still early for us on the enterprise, but because of the robust growth in pipeline that we're seeing, we're optimistic that trend will continue also in the enterprise segment.

Okay. And just as a follow-up, Vlad, you'd mentioned that you want to double down on innovation in 2017. Just wondering if you can give us an idea of what you see as the next areas for growth across the industry and the areas of growth for RingCentral.

So as I mentioned, we currently enjoy the fact that we're the only scaled-up provider out there with traditional communications through the cloud, messaging and collaboration, best-in-class video, best-in-class Contact Center, and an open platform all under one roof on a single bill and all available pretty much worldwide through our Global Office offering. So that is a very, very strong position, so when we say we're going to double down, basically it's going to be a better, tighter integration between all of these different aspects of our product suite.

We're investing heavily in user experience, especially in user experience for our midmarket and enterprise customers. And this includes direct user, as well as, very importantly, administrative experience there. And we are huge believers in the open boundaries in the world of cloud applications, so very heavy investment in making our platform more robust, more open, signing up more partners, more ISVs, and really hoping in turning the RingCentral platform into a de facto standard in this industry.

Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question.

Hello, guys. Nice job and congrats. My first question maybe to Vlad here. You're obviously seeing really nice expansion within existing customers, so two quick things here. One, what does that penetration look like in that base? If I take the midmarket enterprise and I look at the ability to expand, what's the opportunity just within that base? And clearly they are buying multiple facets: the integration, Glip, et cetera. What does that do to ARPU over, say, the next 12 to 24 months?

So you picked it up correctly -- is many of our key wins do leverage the integration aspects of our solution, and they are choosing RingCentral not for any single capability that we have necessarily, but many of them choose for a combination of those. It does get us into larger and larger companies and enterprises. And nature of the beast is that we often start with less than a full penetration and end up basically in a land-and-expand scenario.

So I think we reported that 40% of new business came in from existing customers. That is, we think, a very, very healthy metric, and we see more of it to come. And Dave, I don't know if you want to add anything to this.

The land-and-expand opportunity is big for us as we introduce new products. We talked about Sungevity adding Contact Center, so obviously our revenue per account increases as we are able to penetrate these. Additionally, initially with many accounts we go in with a smaller component of the business, so over time we add and achieve the full potential of that account and grow that business. So it affects us kind of in multiple dimensions in a positive way.

One quick follow-up for Clyde here. There was a delta, Clyde, as I look at the ARR metrics that you guys have put out there and just revenue. I look at that and I say okay, that delta, is that largely due to -- like just to clarify -- is that largely due to the enterprise linearity, which obviously does interest bookings for next year, or was there something else going on there? Thank you.

We talking about the bookings versus revenue, yes?

Sure, either one.

As Dave and Vlad indicated, more and more of our business, and this is a conscious spot of our strategies for midmarket and enterprise. And as you very well know, Bhavan, that tends to be linearly back-end skewed, particularly enterprise. That's been the consistent behavior. So that explains that, and you could so for 2017 forecast, we had very good forecasts above what people were expecting. So that's what you see there.

And what you see and what I want to highlight is the 31% ARR growth year-over-year. And that type of mix shift as we move into more midmarket and enterprise is being factored into our modeling going forward for what we give in guidance.

Our next question comes from the line of Will Power with Baird. Please proceed with your question.

Great. Thanks. A couple of questions. First, I just wanted to ask you on the Avaya bankruptcy, is that actually creating direct near-term opportunities for you all specifically, or is it really just more of a broader reflection of the shift to more cloud opportunities?

That's a great question, and the Avaya situation, one, I do think it is, to answer the second part first, is a reflection of the broader opportunities and customers demanding to go to cloud. What we do see in the market, it does affect buyers as they look at their options to move to cloud or to re-up on their current system, and it starts weighing on that decision. But even more impactfully, immediately we're seeing the reseller channel -- it is significantly impacting them as they know that the customers are choosing cloud, and they need to move to a cloud provider, and we're seeing a lot of movement in that area.

Okay. And then I also just wanted to ask you about the Telco channel. It sounds like that continues to perform well. Any further color you can provide there, and I guess any specifics with respect to AT&T? I guess it looks like that continues to perform well, but I'd appreciate any other color on that front.

Sure, and let's talk about AT&T. We continue to get new business from AT&T, but we have thought it prudent to take a very conservative modeling aspect going forward and for planning purposes only, have assumed no new business from the AT&T channel. We have been successful at expanding our overall indirect channel, as you saw the 20 new master agents we signed in 2016. And Bill, going forward we expect decreased reliance on any one channel partner, and that's giving us a lot of confidence in our ability to get to $1 billion by the end of 2020.

Our next question comes from the line of Terry Tillman with Raymond James. Please proceed with you question.

Hello. Good afternoon, gentlemen. I had a couple questions and, while I know we're supposed to have one question and a follow-up, but I want to go in a different direction and provide editorial so hopefully I can throw that in as well. Vlad and Clyde, you all did a nice job, but Dave, you nailed it with some of the metrics around the up market and enterprise business, so it's good to get that color.

My first question just relates to the five seven-figure transactions in Q4. And I know, Dave, you talked about a quadrupling of the pipeline, but just so we kind of have expectations set for going forward and how large deals play out, those seven figure transactions, was that a bit of seasonality or budget flush with the end of the year kind of the big deals playing out there, and then we could see a dip? How do we think about the maturation of large deals over a full-year period or quarter-to-quarter?

There is -- obviously we are gaining a lot of traction in that category, and we're proud of the five seven-figure deals that we signed. Going forward, there obviously could be some seasonality to it, but the things that give me confidence is looking at the quadrupling of our pipeline as well as the investments in the team that we've made in the midmarket and enterprise segments, as we continue to grow those teams significantly, and the additional reseller partners we have been able to add that are bringing us into deals and some of them that have closed quite quickly. So in summary, yes, there could be variability on a quarter-to-quarter basis, but the long-term trend looks very promising.

Okay. And Clyde, my follow-up question just relates to -- I need to be able to tell investors an apples-to-apples comparison because you've changed the revenue model again back to the direct model like you used to be. Can you repeat again what the -- if we look at the guidance for 2017 -- because I didn't have a direct model baked in -- what the revenue would look like X-ing out this shift back to a direct model? Thank you.

Sure, Terry. In Q1 it's about -- the guidance we gave is about two points lower if you take the revenue, and for the full year it's about three points, obviously, as we go longer.

Thank you. Nice job.

Thanks.

Our next question comes from the line of Mike Latimore with Northland Capital Markets. Please proceed with your question.

Great. Thanks. The quarter numbers look great. Back on the AT&T comment, maybe a little more color there would be helpful. You said you assume, I think, no new business. Can you discuss why that's the case, and what do you expect with the current customers on your platform via that channel?

Vlad here. Look, as Dave mentioned, we tend to project conservatively. I think it's a well-known fact that AT&T introduced a new competitive solution. While we don't really see them broadly in the marketplace, we expect them to be paying more attention to it going down the line.

We are, again as Dave mentioned, we are seeing new business from them up until now, but we just felt that it is prudent to project conservatively, and let news be good news. As far as the installed base is concerned, we've projected basically natural churn curve as it pertains to that base. And that is what's been baked into our 2017 guidance as well as in our longer-term projections, which lead us to $1 billion by the end of 2020. So all that has been taken into account.

Okay, got it. And then just, Vlad, you'd said that a lot of your customers -- I think you said they were actually replacing some of the other communication systems they have. Focusing specifically on video conferencing, any idea what percent of your midmarket and enterprise customers are actually replacing their current video conferencing and using you guys?

So that is a key element of how we price and package our offering today with our premium offer. And our premium offer and above is over 65% of our new business, so it's an important aspect. It creates strong TCO components as you go and provide many elements of this product offering that used to be provided by multiple vendors can now be provided by one world-class vendor. And that's where we see the enterprise communication collaboration meetings all coming together for a very compelling offering in the marketplace.

Okay, thanks.

Our next question comes from the line of John DiFucci from Jefferies. Please proceed with your question.

Thanks. Question for David. David, RingCentral's moving nicely up into sort of the 5,000 or even you guys spoke of 10,000 or more potential seats for potential customers this year. Are there any logical barriers, technical or otherwise, for adoption from even larger customers, a larger enterprises, 100,000 seats? Is there anything right now that you have to overcome, or is it just that right now, anyway, those kinds of companies aren't engaging for a SaaS solution for their unified communications right now? But there's -- I don't know -- if you can address that?

This is a trend we've seen over time as the larger customers are adopting cloud solutions and leaving their legacy solutions. So the momentum we've seen into the 10,000-plus accounts is highly encouraging. There isn't technical limitations in that regard, and so I believe it's more of time as these customers get more comfortable and see the adoption happening that we'll see greater and greater sized organizations adopt a cloud solution.

So if you had a customer right now that 100,000 seats came in, you'd be able to accommodate them?

John, hello. Vlad. Yes, the short answer is yes. We are routinely testing -- as part of our internal quality assurance procedures, we are testing on very, very large accounts in the lab.

So and as a reminder here, we are a 100% pure multi-tenant cloud architecture. We have millions upon millions of endpoints on our platform already, and from the platform perspective, it really makes no difference if any given combination of those is bunched together as 100,000-user account or 25,000-user account. So we're dealing here with lengths of sales cycles.

Not too long ago it seemed that a 1,000-user opportunity is a reach for us. Now we're routinely talking of 5,000-user opportunities, and we're starting to mention 10,000 specifically. So strongly believe it is just a matter of time and also with what's happening in the industry and the issues that Avaya is having, for example, those customers need to go somewhere. And within that we are by far the best platform for them to migrate to at this point.

Great. Thanks, Vlad. If I might, just a follow-up. You mentioned a couple of large deals with integrated Contact Center portions for the deal. Its been about a quarter since the closing of the acquisition of inContact by NICE. I'm just curious, have you seen any change there? NICE is a much larger company, so its got greater scale, and I'm curious if that's had any impact on your business with the integrated Contact Center.

The Contact Center we had, again, record quarter in the Contact Center. We had Genex -- Contact Center being an important component of that, as well as Sungevity. And the relationship with inContact remains very strong.

They've been a very good partner, and we haven't seen a change in that since the acquisition. And we continue to create a very integrated experience for our customers and differentiated experience for our customers of bringing those two solutions together.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

Hello. Thanks for taking my question. I wanted to see if there was an update to -- at the analyst day you had given that you had 20,000-plus user deployments so far in 2016 -- if there was an update to that number. And then the second question is you're running subscription gross margins that are now kind of above your target model, and so just wondering how sustainable those are. And those are the two questions, thanks.

So on the number of users, we've added about 10% to 20% more, so it's in the 23,000, 24,000-plus customers, Meta deployed. And could you repeat the second part of your question on targets?

Just that your gross margins came in at 81% -- or the subscription gross margin, which is kind of above your target model of getting into 80% gross margin.

So last time we said -- thank you for that question -- last time we said our gross margins to be 80%, plus or minus a point. So this time it's going to be plus a point. I think that's the strength of part-enterprise, part-premium, which enterprise do, as Vlad and Dave indicated a few minutes earlier. So I think we will continue to see strength. We aren't changing our long-term targets at this point in time, so we'd stick with that 80%, plus or minus a point.

Great. Thanks.

Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Hello, this is Nina [Consa] in for Sterling Auty. Thanks for taking my questions. My first question just to follow-up on that inContact comment you made earlier, just any other updates on the context under competitive landscape, if you have any investment plans going ahead?

And then my second question is going to be on the unit economics. You talked about the impressive improvement there, and going ahead, what kind of trends should we expect on that end, if you can get us more color there? Thank you.

On the Contact Center, the competitive environment, I think it is reflecting similar trends that we're seeing in the UCaaS market of a preference of organizations to move to the cloud. We have seen a preference of integrated Contact Center and UCaaS solutions that are benefiting us in that regard. I think it's leading to why we're seeing strong growth in record quarters in that. So I think what you're seeing in our core business, you're seeing also in the Contact Center business from a mega trend. And then the last was on unit economics. Go ahead, Clyde.

So our unit economics has improved from you go back to the IPO days. What we published today was it used to be six. It's now eight in aggregate, but the better way to look at it, we provided at the analyst day, which we refer to, our small business, which is customers less than 50 seats, they generate about $7 of lifetime revenue. The midmarket which is 50 to 1,000 generates about $12 of lifetime revenue, and enterprise generated about $15 of lifetime revenue. So if you look at where we are, it depends on the mix of that as you go forward.

Today we had about $9, which has a mix of about 40% of midmarket and enterprise, so that gets you that boost. Over time, as we mix up more enterprise, that average should go up. Just to refer back to what we presented you at the analyst day, we had a 35% mix of small, 45% of mid, and 20% of enterprise. That should yield another $2 of unit economics, getting to about $11 of unit economics over that period of time.

Our next question comes from the line of Jonathan Kees with Summit Redstone. Please proceed with your question.

Hello, thanks for taking my question and congratulations on the quarter. I have two questions. One, as you grow your midmarket and enterprise team -- and that includes professional services, you have the extended services group now that's growing within professional services to cater to larger customers.

I know you had said that still think about gross margins around 80% plus or minus in terms of going forward. How should we think about the services gross margin and the headwind there? Or is it that any headwind, when it becomes material, you're offsetting that with improvement at your data centers?

And then the second question is, can you just provide an update in terms of BT and Telus? At one point there was a lot of potential with those two carriers, and just curious if they have been performing according to your expectations, or if activity has dropped off with those two carrier channels. Thank you.

I'll answer the question on gross margin, and I'll pass the BT and Telus question over to Dave. So subscription gross margins last quarter was 81%, about 80% for the full year. As the prior caller asked, we expect that to sustain itself going forward, call it plus or minus a point. And that's a substantial part of our revenues overall.

The other revenue includes prop services, and what we've said is that should dial in about 15% to 20% gross margin, with about 8%ish of our revenue mix. That should yield something in the mid to high 70%s overall gross margin, and we expect that it might fluctuate a little bit but it should be within that range. I'll turn it over to Dave on the BT/Telus question.

The BT and Telus relationships are strong. Those relationships are obviously newer, and those organizations are -- and Telus in particular is not as large as some of our other partners. But the relationships are strong. It is good momentum in the fold, and also we look at opportunities going forward for further product offerings with those partners.

There are no further questions in the queue. I'd like to hand the call back over to Vlad for closing comments.

Thank you. Well firstly, thank you, everyone, for taking the time to listen to our call and for all of your support throughout the years. Look, in summary, I just want to highlight that we've been making investments and, frankly, fairly heavy investments in product innovation, in making our products global, as well as midmarket- and enterprise-ready, and, very importantly, in growing our midmarket and enterprise channels across-the-board.

The thing is, these investments are now definitely bearing fruit. 50% of our new bookings came from midmarket and enterprise, and, as I mentioned, it is now a $100 million business growing at over 90% year-over-year. So with this in mind, and with the fact that we are seeing a strong and a yet improving traction in midmarket and enterprise, we're very confident in our guidance for this year, 2017, as well as in our midterm goal of achieving $1 billion by the end of 2020. So it's going to be a good ride.

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.