RingCentral Inc (RNG) 2018 Q1 法說會逐字稿

Greetings, and welcome to the RingCentral First Quarter 2018 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.

Thank you.

Good afternoon, and welcome to RingCentral's First Quarter 2018 Earnings Conference Call.

I am Paul Thomas, RingCentral's Senior Director of Investor Relations.

Joining me today are Vlad Shmunis, Founder, Chairman and CEO; David Sipes, Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Dave and Mitesh, followed by Q&A.

Some of our discussions and responses to your questions will contain forward-looking statements.

These statements are subject to risks and uncertainties.

Actual results may differ materially from our forward-looking statements.

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.

RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call.

I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, 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 the slide deck posted on our Investor Relations website.

With that, let me turn the call over to Vlad.

Good afternoon, and thank you for joining our First Quarter Earnings Conference Call.

First quarter results were excellent.

Q1 showed outstanding revenue growth, operating profit and EPS performance.

Our core subscription business accelerated as mid-market and enterprise customers continue to adopt our industry-leading cloud communications solution.

Our channel partners delivered another strong quarter of growth and we set the stage for continued growth by announcing innovative, new products.

Let me begin by covering some of the key highlights of the quarter.

First, total revenues for the first quarter grew to $150 million.

This is a 34% year-over-year increase, up from 30% in the year ago quarter and above the high end of our guidance range.

Second, our core subscription business, excluding AT&T, accelerated even faster.

In Q1, our core subscription revenues of $125 million grew 37% year-over-year, up from 32% in the first quarter of last year.

Third, our mid-market and enterprise business had another outstanding quarter.

We define mid-market and enterprise as 50 seats or greater.

This is now an over $200 million business that grew 77% year-over-year.

Now for something really exciting.

Last quarter, we introduced a new enterprise business metric.

We define enterprises as customers with $100,000 or more in annual recurring revenue or ARR.

This quarter, our enterprise business ARR crossed $100 million, and it grew more than 110% year-over-year.

It is clear that the cloud is winning, and RingCentral is winning in the cloud.

The legacy players' struggles are mounting.

They're consolidating.

They are going private.

The legacy systems simply cannot effectively meet the modern communication and collaboration needs of mobile and global and distributed workforce.

Nowhere was this more apparent than at last Enterprise Connect, the leading conference for enterprise communications and collaboration.

We believe many of you who attended the conference would have noticed that RingCentral had the most extensive presence at the show.

This year at Enterprise Connect, just as last year, legacy players gave lip service to the cloud.

However, their solutions are still tethered in their on premise history.

While the competition talks about the cloud, we continue to deliver.

This quarter, we launched 3 new innovative products: RingCentral Collaborative Contact Center, RingCentral Pulse and Collaborative Meetings.

RingCentral Collaborative Contact Center is a differentiated solution that synchronizes Contact Center agent groups with Glip feed.

RingCentral Pulse provides intelligent service bots that monitor critical call center metrics in real-time.

It sends automated alerts and notifications directly to Glip teams.

This enables agents and supervisors to communicate and collaborate across their organization in real time to resolve customer issues efficiently.

Finally, RingCentral Collaborative Meetings deliver integrated key messaging and videoconferencing to enable a well-differentiated and productive meeting experience.

Innovations like these certainly reinforce our industry leadership position.

There are only a handful of scaled-up, pure-play cloud companies in the market, and we are the clear leader.

Last year, RingCentral grew twice as fast as the #2 company in our space on a business that is nearly twice as large.

I am pleased with our first quarter results.

Our core business strengthened.

We extended our leadership position in the cloud with excellent traction in the mid-market and enterprise business.

And we enhanced our platform with new and innovative solutions.

The future looks bright.

We are still in the early stages of this $50 billion-plus opportunity.

And as an industry leader, RingCentral is in prime position to benefit as the on-premise market continues its transition to the cloud.

With a great start to this year, we are well on our way to our $1 billion target by 2020.

Now for some color, I will turn the call over to our Chief Operating Officer, Dave Sipes.

Thank you, Vlad.

We definitely had great results across our business.

This was led by mid-market and enterprise customers.

In our enterprise business, we saw triple-digit year-over-year growth and crossed the $100 million milestone in ARR.

The keys to our growth have been the investments we are making in our technology platform, the field enterprise sales force and the channel partner network.

We continued to expand our channel reach this quarter by signing up additional partners, including another major Avaya reseller.

Our global expansion continues as well, and this quarter, we opened a new sales office in Australia, where we already signed new channel partners.

Our success begins with our commitment to innovation.

Our market-leading product suite helped us close numerous, significant deals in the quarter.

Let me give you some color on just a few of our wins.

For example, Citizen, a global watch manufacturer and distributor, was using multiple communication and contact center systems to manage their business.

The company wanted to unify this to a single cloud platform.

They chose to deploy our integrated RingCentral Office and RingCentral Contact Center solution.

A key differentiator for us in this win was our recently announced collaborative contact center featuring our innovative RingCentral Pulse technology.

We won this with a channel partner and replaced 2 legacy vendors and 1 cloud vendor.

This quarter, one of our most significant wins came from Corporate Travel Management North America, a leading corporate travel management services company.

They chose RingCentral for its best-in-class communication and contact center on a unified platform with unified support.

Our integrated team messaging capability sets us apart in the marketplace.

It was key to an enterprise win with a leading company in the education space.

They chose RingCentral and plans to standardize on Glip as the primary communication application for seamless integration of voice, video and messaging capabilities.

This is just one example.

We saw many customers across all segments who cite our integrated team messaging and communication solution as a key decision factor for choosing RingCentral.

Our expanding global coverage continues to be a compelling differentiator for us as well.

This quarter, a large financial services organization was looking to transition off multiple legacy providers across multiple countries.

They chose RingCentral for our global coverage, which greatly simplifies multi-country deployments, eliminating the need for multiple carriers and hardware deployments to manage.

Their initial deployment will cover 4 countries with future potential to expand to more.

Another key differentiator is our open developer platform.

This quarter, Procore, a provider of applications for the construction industry, needed a solution that would span globally across their business and would easily integrate with their other cloud applications.

They chose RingCentral because of our integrations with Google G Suite and Okta and our Global Office capabilities.

This deal was also won with a channel partner.

And many of our enterprise customers are just beginning with us.

While they initially deploy RingCentral in a few offices or a region, they typically have a much larger employee base.

Over 40% of our new business comes from existing customers.

For example, AssuredPartners is a fast-growing national insurance agency with numerous offices across the country.

They had multiple legacy systems which were complicated to manage.

We won this account with a leading channel partner.

They started with about 500 seats of RingCentral across a few offices.

The users liked the expanded capabilities of the RingCentral solution.

Additionally, administrators were impressed with the significant benefits of centrally deploying and managing the solution.

This quarter, AssuredPartners decided to standardize on RingCentral across their organization and contracted to add an additional 4,000 seats.

In summary, we are differentiated on our integrated communication, collaboration and contact center platform, our global coverage and our open developer ecosystem.

Our market-leading product suite helped us win significant deals from new customers as well as from existing customers.

We are committed to innovation and customer success, and we believe that we are well positioned to expand our lead in the industry.

Now, for some color on the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

Thanks, Dave, and good afternoon, everyone.

Before I begin with the results, I want to ask that you refer to the slide deck posted on our IR website that provides the key points in our call today and some supplemental information.

We have adopted 606 starting Jan 1, 2018, under the full retrospective method and have provided comparative numbers for comparable periods for 2017 in the slide deck and press release.

Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons.

A reconciliation of all GAAP to non-GAAP results is provided with our earnings press release and in the slide deck.

With that, let's move on to the results.

We had a solid start to 2018, with all our key financial metrics beating the high end of our guidance.

Our performance was driven by our mid-market and enterprise customers and continuing momentum with our reseller partners.

Our core subscription revenue growth accelerated, and we translated that momentum into strong profitability.

In Q1, our subscription revenue grew 32% year-over-year to $137 million, up from 30% a year ago.

Normalizing for AT&T, our core subscription revenue grew 37%, up from 32% a year ago and up from 36% last quarter.

For more historical data on our core growth trends, see our earnings slide deck.

Total annualized exit recurring subscriptions, or ARR, grew to $589 million, up 31% year-over-year and 8% sequentially, up from 6% sequential growth in Q4.

ARR for RingCentral Office grew to $509 million, up 37% year-over-year and 9% sequentially.

Our mid-market and enterprise business led the way again.

It is now over a $200 million business and grew 77% year-over-year.

Our enterprise business represented half of this business over $100 million, growing in triple digits.

Mid-market and enterprise business also contributed over 50% of new sales for RingCentral Office, up from 40% last year.

Our channel partners delivered another outstanding quarter of growth.

ARR from our channel partner business is now over $115 million business, and it grew nearly 100% year-over-year.

Our focus on mid-market and enterprise customers and our working with channel partners yields many benefits.

First, lower churn.

Mid-market and enterprise customers have less than half the gross churn rate of small business customers.

In addition, customers acquired through a channel partner also have less than half of the gross churn of customers than purchased direct.

These trends brought record-low churn in Q1.

Second, these customers seed our land-and-expand pipeline.

Typically, customers begin transitioning to cloud communications by purchasing RingCentral for just a portion of their employees and not all products.

This presents a significant opportunity to upsell, as adoption of cloud communication grows within the customer's business.

Once again, over 40% of our new office business came from existing customers.

The combination of these positive indicators drove robust net retention in Q1.

Moving on to the financials.

Q1 was strong across revenue and margins.

Total revenue for the first quarter increased 34% to $150 million.

Subscription gross margin was a record 82.8%, up 140 basis points year-over-year.

I would note that we benefited from some onetime catch-up payments totaling a little less than 1 point.

Operating margin was 8.6%, resulting from our strong top line and gross margin performance.

We ended the quarter with $555 million in cash, an increase of $374 million from Q4.

This increase reflects the net proceeds from our 0% convertible debt offering recently.

Now for an update on AT&T.

Last quarter, we announced that we would transition all Office@Hand by AT&T customers to a direct billing and account relationship with RingCentral.

The customer transition is progressing.

It is early in the process, but for the customers that have migrated, we are seeing high levels of customer satisfaction.

For guidance purposes, however, we continue to make conservative assumptions that factor in normalized churn as well as potential incremental churn from migration.

Consistent with last year, we continue to assume no new incremental business from these customers.

Turning to our outlook.

We are increasing our 2018 outlook, driven by strong Q1 results and the benefits that will carry throughout the year.

We expect subscription revenue between $588 million and $594 million for an annual growth rate of 26% to 28%.

Excluding the impact of AT&T, we expect core subscription revenue to grow 32% to 34%.

The relative impact of AT&T on our overall growth will begin to abate in 2019 as our revenue base gets larger and AT&T compares normalize.

We expect total revenue between $638 million and $647 million for an annual growth rate of 27% to 28%.

We expect non-GAAP operating margin of 8.1% to 8.3%.

We expect non-GAAP EPS of $0.61 to $0.65 based on 86 million fully diluted shares.

The difference between GAAP and non-GAAP EPS is expected to include $0.83 of stock-based compensation, $0.19 of amortization of debt discount relating to our convert and $0.06 of amortization of acquired intangibles.

We do not forecast any effects of currency remeasurement, which could be a significant reconciling item between GAAP and non-GAAP EPS because it is difficult to predict and subject to constant change.

Now for Q2 guidance.

In the second quarter, we expect subscription revenue between $142.5 million and $143.5 million for an annual growth rate of 28% to 29%.

We expect our core subscription revenue to grow 34% to 35%.

We expect total revenue between $154.5 million and $156.5 million for an annual growth of 29% to 31%.

We expect non-GAAP operating margin of 7.5% to 8%.

We expect non-GAAP EPS of $0.14 to $0.16 based on 85 million fully diluted shares.

The difference between GAAP and non-GAAP EPS is expected to include $0.21 of stock-based compensation, $0.06 of amortization of debt discount and $0.02 of amortization of acquired intangibles.

Again, we do not forecast any effects of currency remeasurement.

You can find all our guidance details in our press release and our earnings deck.

In summary, we are pleased with the performance of our business, led by traction in the mid-market, enterprise and channel, and expect a solid year ahead.

Finally, we are excited to invite you to our RingCentral Investor Day in New York on Thursday, June 14.

Please join us as we outline the state of our business today and where it's headed tomorrow.

You'll hear updates on strategy, innovation and vision for the future.

You'll also hear directly from RingCentral customers and partners.

We look forward to seeing you there.

With that, let me turn the call to the operator for Q&A.

(Operator Instructions) Our first question comes from the line of Kash Rangan from Bank of America.

One question for you, Vlad, and one for you, Mitesh.

One for you, Vlad.

You've seen a lot of changes to your competitive landscape.

Mitel went private at the same time Avaya emerged from bankruptcy.

They're now a public company.

What does this pose in terms of a change or not so much of a change for RingCentral's strategic position and your ability to continue to win business?

And one for you, Mitesh.

We've rarely seen the company beat earnings by this kind of magnitude.

I wonder what we should make of this beat as it pertains to investors' perception of operating leverage for the company in the future.

Great, Kash.

Yes.

So no, great question.

Short answer is we haven't seen much change in the competitive landscape with the Avaya bankruptcy and then their emergence and in the Mitel news.

And it really has to do in our minds with the fact that none of these machinations really change the fact that neither is really a cloud provider.

And we continue seeing very high win rates against both.

These are, call it, 75%, 80% range.

And at least for now, we are not seeing any change in those rates to the negative for us.

We don't see any strengthening for those 2 particular companies or, frankly, anyone else in the field.

I mean, our numbers continue speaking for themselves.

Yes, Kash, it's Mitesh.

And to answer your question on leverage here, so yes, it was a strong quarter.

Most of the dominoes fell our way this quarter.

We did beat The Street estimates by about $5-ish million on top line and about $2.5 million, $2.6 million on the -- fell through the bottom line.

And so the upside flow-through from the revenue beat was north of 50%.

That really sort of speaks to the leverage or the inherent leverage in the business model where treat this 50% incremental revenue margin as a proxy for your installed base recurring margin.

And so the playbook is going to be similar with the way we have been executing in the past, which is we will be thoughtfully deploying this upside over the course of the year and adding capacity to our GTM and our innovation.

And then that will further fuel the growth, so it's a virtuous cycle here.

And that basically led us to raise our revenue guidance, operating margin guidance and the operating profit dollars over and beyond the beat in Q1.

Our next question comes from the line of Bhavan Suri from William Blair.

I guess, Mitesh, first, I just wanted to touch a little bit on your upmarket metrics.

Last quarter, you provided net retention rates for the upmarket business was 130%.

Just some color on that and sort of the drivers behind that.

And then I've got a quick one for Vlad.

Sure, Bhavan.

So on the upmarket metric, yes, we did not provide this exact number this quarter.

It was not meant to be a quarterly metric.

But since you asked the question, yes, the number was over 130% again, the net expansion rate.

And the drivers are sort of twofold.

One is we did experience record-low churn, gross churn.

And we saw one of our strongest quarter for upsell into the existing installed base.

Now just addressing both those in that same order.

On the lowest gross churn, which was the record-low churn we saw, was because of 2 things: one is organic low churn in each segment, along with the mix shift.

This mix shift also is driving positive churn for us because 40% of our ARR and about half our bookings comes from the upmarket segment.

So that's one on the churn.

On the upmarket side, the theme -- on the upsell side, the theme we are seeing from customers is that people who are customers want to reduce the number of disparate solution or discrete solutions into one unified application.

And they are simplifying the IT stack for business communications for higher productivity and lower costs.

And so what we are seeing as a result is customers adding more seats domestically, more seats globally, and they're also adding more products to their portfolio.

So if you just take one example, in the last quarter, is Pac Dental, which we've had the fourth quarter in a row of upsell in that -- with that customer.

The seat count now is north of 5,000, and the total potential seats for Pac Dental is more than -- almost like 2x of that, so 10,000, call it.

And they have really adopted a slew of our products, and they are adding more seats.

So you're seeing a combination of all these factors resulting into high net expansion rates.

Got it.

That's helpful.

And then maybe one for Vlad here.

So when you look at the partner channel, you obviously have a team of guys who go up there and sort of recruit partners.

But you've also started to see an inflow of partner saying, "Hey, we want to partner with you because our customers are looking for sort of a flexible cloud solution." Has there been any change in that?

Have you seen sort of more partners coming to you?

Has there been sort of any change in that trend or inflection in that trend from the partners acquisition side?

Yes, Bhavan, so our COO, Dave Sipes, is here, so he can maybe provide a little bit more color.

But I'll just say at the high level, we certainly are seeing market come to us more than in the past, and that applies across the board, both direct business as well as indirect in the VARs.

It's really now most folks are recognizing that cloud is here to stay, that if you're a VAR, if you're an enterprise, you have to be -- to consider a cloud solution.

Obviously, we are well positioned there.

And if you're a VAR, your customers are asking to be presented cloud alternatives, and we are the undisputed leader.

So I think, at the high level, yes.

Dave, if you can add to that.

Yes, it's Dave Sipes.

And our largest channel show that we were at a month ago, channel partner show, that one of the biggest themes was that for all the partners, unified communications-as-a-service has become probably their #1 focused product.

So we are seeing a shift in the market as the customers are shifting, that they are looking to -- that this is their #1 selling aspect going to market.

And that we are benefiting from that as we are signing on new partners and ramping up our current partners that we've signed.

Our next question comes from the line of George Sutton from Craig-Hallum.

This question's probably best directed at Dave.

With the growth rates accelerating, your win rates, it sounds like, remain the same, at least against the competitors you talked about before.

That would suggest that your funnel is substantially larger.

And I just wondered if you can give us a picture into the funnel relative to how that has been built over the past couple of quarters, clearly in an accelerating way.

Yes.

I think as we've made a focus on mid-market and enterprise and we see that shift in the marketplace, we've made those investments on a go-to-market perspective.

I think you're seeing that in our growth rates in those sectors, now over a $200 million business, growing at 77% year-over-year.

We still see -- and as far as pipeline, we measure that out 6 to 9 months ahead of time and track the growth in that ahead of the growth that we're putting in the market from a sales perspective.

We still see a lot of opportunity to continue growing that very aggressively, both -- and we talked about covering major cities, but there's further saturation of major cities as well as looking at even larger segments of 10,000-plus employee basis and international growth with our U.K. market.

So all of those are creating -- we see the opportunity to continue to expand, and we are.

There's also -- and we're getting 40% of our new business from the existing base as they -- as Mitesh mentioned, as they're adding new users domestically, internationally and on new products.

Perfect.

One other question relative to your Collaborative Meetings offering.

You are offering that on a stand-alone basis in addition to other ways.

But it surprises me a little to see this as a stand-alone offering.

I wondered, is that meant to fuel additional pipeline for the future?

Is that part of the logic?

It is.

And we -- it's Collaborative Meetings that combines Glip and team messaging collaboration with meetings.

It allows organizations that we've seen in the marketplace, sometimes they'll move that product first to the cloud and then later the PBX.

And we wanted to make sure that we could satisfy that desire for them.

And it allows us to get into those accounts and then utilize cross-sell across the integrated product suite by then selling PBX and Contact Center.

Our next question comes from the line of Jonathan Kim from Goldman Sachs.

It's actually Heather.

Wanted to ask 2 questions.

You mentioned that 40% of your business comes from partners.

Can you share with us how the partner network's been expanding in terms of, like, feet on the street or number of partners?

And also, are you starting to see some of the larger SI partners build practice groups?

And then I just had a follow-up.

Heather, it's Mitesh.

So one clarification.

What we mentioned is that 40% of our business came from upsell into existing customers.

But that said, so that metric is a little bit -- we do not disclose that channel contribution.

We did say, on the partner side, that our partner ARR was north of $115 million business, growing close to 100%.

So that's the metric we gave out.

In terms of the -- your question was on the ramp of the channel partners and the buildout.

I think, look, it is in the early stages of ramp.

We are signing up partners for Avaya and Cisco, and we are seeing a lot of traction within capturing the installed base for the legacy players currently.

And then more -- there's more deeper efforts within the channel partners to further fuel the fire there.

Okay, great.

And then just the follow-up was related to, obviously, your mid-market and enterprise ARR build looks very strong.

I'm just wondering, you were just talking about the sales footprint ramp that you've seen.

Is there any data you could share with us about the pace of that sales footprint ramp in the last fiscal year and give us a sense of what you expect it to ramp at in comparison this fiscal year?

Sure.

I'll take that as well, Heather.

So we don't exactly give out the sales of -- exactly the sales headcount and ramp.

But what I will tell you is that our sales headcount capacity in the mid-market and enterprise is growing slightly slower than the 77% growth rate we've had.

And that as a result of productivity gains we are seeing from the segment.

As these segments mature, we are seeing the benefit of tailwinds from incremental ramp -- ramped the [world am] sales force.

Our next question comes from the line of Terry Tillman from Raymond James.

I guess maybe, Mitesh, first question for you is just related to an update on metrics or guideposts as it relates to the Global Office business.

I'm assuming that's APRU accretive, but just anything that -- some more color on Global Office and how that's trending.

Sure, Terry.

We have not given that color in a while, so it's a timely question.

We have about 1,000 customers on Global Office now.

And the good thing about Global Office is this is an entry or a key for us to win multinational accounts in the U.S. and the U.K. The other factoid on Global Office which is interesting, is that for every 1 Global Office user we have across the globe, they actually pull in 4 to 5 new seats for the headquartered customer.

So if there's 1 customer employee in France, there'll be about 4 or 5 employees in the U.S. So that's sort of a reverse pull-through we are seeing for Global Office.

In terms of our footprint on Global Office, we cover about 37 countries, the footprint covers that, which is a significant portion of the GDP.

And what we are doing, that's on the technology side.

And on the go-to-market side, what we are doing is, with our usual deliberate and methodical approach, we are doubling down on certain geographies where -- like Europe and Australia, where we are now building out our go-to-market presence in terms of direct sales force and channel partners.

Awesome.

I guess, I don't know if this would -- who this would be for but I'll just throw it out there.

So all the color you provided is helpful in terms of the upmarket business in total.

Then kind of peeling back the onion, it looks like, obviously, the enterprise business is growing well over 100% on ARR.

Our calculations would say the mid-market is like 50% to 60% growth, and hopefully, I'm right there directionally.

But I'm curious, with the 2 growth opportunities in both those segments, and there is probably a different kind of sales motion or GTM, how do you all think going forward about incremental investments?

How much will you apply to enterprise to go after that versus mid-market?

Just would love an update on how you think about splitting up those investments between the 2.

Yes.

So I think the question is I'm going after the mid-market or enterprise more aggressively.

They're both large growth factors for us.

The enterprise is even more greenfield as more customers are now opening up and moving to cloud.

So you would see incrementally faster investment in the enterprise over the mid-market like you've seen.

But both are achieving growth rates that are well above the corporate growth rate and provide acceleration opportunities for us.

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

It's Yuuji Anderson on for Meta.

I think most of them has been answered, but maybe 1 on AT&T.

I understand you're being pretty conservative on your assumptions there as they make those transitions.

But how should we think about incremental business there?

And like, what is the opportunity set that you're seeing there?

And maybe what is the company doing?

Sure, Yuuji.

It's Mitesh.

So yes, on AT&T, you're right.

We are still dialing in very conservative assumptions, which is here a normalized churn rate, plus onetime churn as well as no incremental business.

But what I will tell you is we are in the relatively early stages of the innings here.

The migration has -- is progressing well.

And for the customers that have migrated, we are seeing very high level of satisfaction from those customers because they are now able to choose from a set of portfolio, which they did not have access to before.

So, so far, so good.

But again, it's 1 quarter, so I would not -- 3/4 of the year is left, so I would just keep the estimates very conservative because you don't know what you don't know.

Okay, got it.

And then maybe a quick one on just the product roadmap.

Appreciate some of the new stuff that you have out there now.

So looking forward, what is the view on continue to build things internally versus, perhaps, going out to the market and buying some of them?

Yes, Vlad here.

Yes, I'll take this one.

Look, we are a technology-first company.

We were founded by a team of engineers, and we've retained our product orientation from day 1 until now.

So majority of what we have now as part of our portfolio is our native technology.

And we like it that way very much because it actually is a very good differentiator from some other folks in the market where, to be blunt, they don't own their stack, and that creates issues and competitive disadvantage for them.

So we continue out-investing our direct competition.

We tend to out-invest the next company in this space by about 2 to 1. We've been doing this for a number of years now.

So I think cumulative gap now is maybe approaching triple digits, $100 million or so and growing.

So having said all of that, look, we can't do it all.

There are lots and lots of good companies, younger companies, good ideas out there.

We're always on the lookout.

As you know, we had one acquisition so far.

It was immensely successful for us, that's Glip, it's provided a very clear differentiation.

It's winning us major accounts, brands that, frankly, would be harder for us to get if we didn't have it.

So given that success, we are looking, but -- and we are open, but we are prudent.

And I can tell you that people are calling on us pretty regularly these days.

And as you can see, we haven't pulled the trigger yet.

Not to say that we will not.

We do want to expand and extend and enhance the portfolio, but again, in a very prudent manner and something that will be moving the needle if we can find it like Glip did for us.

Our next question comes from the line of Brian Peterson from Raymond James.

So I don't know who wants to take this one, but I wanted to hit on pricing in the enterprise market.

Clearly, that's been really strong.

Is there anything that you guys can say qualitatively about how price per seat or price per user trends have been in that market?

Sure, Brian.

So ARPU trends are strong across the board.

We saw a flat to up APRU across all segments.

On enterprise specifically, we also saw APRU holding steady.

And again, as we've mentioned before, when we go and win larger accounts, there is, of course, pricing pressure, and we do give concessions to larger -- our larger customers than smaller.

But at the same time, given the differentiation in the SKUs we have, larger customers are adopting the higher SKUs, especially with Glip and some of the advanced open API and platform capabilities that's driving the overall SKUs up.

So net-net, pricing is flat to up, yes.

Good.

Good to hear.

And maybe 1 more for you, Mitesh.

Just on the deferred revenue.

That's been increasing pretty steadily over the last few quarters.

Any help on what's driving that?

And how should we be modeling that going forward?

Sure, Brian.

Yes, deferred revenue has been perking up a little bit over the last couple of quarters.

And if you sort of exile the impact of 606, it grew over 40% this quarter.

Which is sort of a leading indicator in a sense that for enterprise, a proxy for enterprise segment.

Now not every customer prepays us annually, which sort of drives the deferred revenue up.

But we are seeing an expanded portion of our customers trying to pay -- or who want to pay us upfront because these guys are enterprise -- these are enterprise customers.

So that's sort of been the driver for the different revenue perking up.

In terms of modeling, I would say model conservatively.

But because -- but no, being tongue-in-cheek here.

But I would see there would be a steady acceleration, I would say, over the course of multiple years where this metric will start perking up and show up in the operating cash flow over time.

Our next question comes from the line of Sterling Auty from JPMorgan.

So relative to the growth in revenue that you showed for the mid- and enterprise customers, I was wondering if you could give us a characterization, what was the growth in the number of customers?

And what I'm trying to get at is just wondering how much of the growth in that business is coming from the expansion as you've gone deeper in some of these bigger and bigger accounts versus how much of the growth is still coming from adding new logos within that part of the business.

Sure, Sterling.

I'll take that.

It's Mitesh.

So the one metric we did give out, I'll answer it a different way, which is our -- actually, 2 ways I'll answer it.

One is -- so both metrics, new logos are very healthy, growing at a healthy clip, along with we did have a record -- almost had a record quarter for upsells into the installed base.

We did say that about 40% of our business came from upsells into the installed base.

And the net retention from our entire installed base in the upmarket was north of 130%.

So if you put these together, what you're seeing is sort of a two-pronged approach where we are landing bigger and bigger logos.

And when we are landing these logos, it's not wall-to-wall.

So and they do give us -- we do get a chance to go to the well multiple times.

So you're seeing the benefit of both those vectors playing into this quarter.

All right, great.

And then on the solutions that you announced at Enterprise Connect in terms of the new solutions, what portion of those are based on partner technology where there might be a revenue share?

But just as important, which ones have kind of partner relationships where maybe you get exposure to their channels and maybe even more reach in to the customer base?

Yes, Enterprise Connect, we announced Collaborative Meetings.

We announced Pulse.

Pulse, for example, is a technology based on our own stack that allows us to integrate the contact center experience with the team messaging and collaboration experience by identifying key metrics and creating notifications into the broader organization.

We also announced Collaborative Contact Center, which does agent synchronization of teams with collaboration teams.

And the last one we announced was RingCentral Collaborative Meetings, which we discussed earlier.

In the contact center ones, I think, your question is, are be able to tap a broader distribution to deliver those solutions against.

And there, we do have both channel partners in direct and that are selling contact center solutions.

And with the uniqueness and differentiation of those products, with like Pulse built on our own stack, that creates uniqueness that you can't achieve anywhere else and drives new business to us.

I will maybe add to that a little bit.

Vlad here.

So yes, so what Dave said, of course.

But I just want to point out that at this point in time, we have the only fully integrated communications as in Cloud PBX, Collaboration, Glip, Contact Center and state-of-the-art VGA meetings all under one umbrella.

And while it's true that we do use third parties for some of this, obviously, majority is the trunk of the tree, which is -- we think is the hardest lift is communications piece, that's entirely ours as well as the collaboration piece.

But in any case, we are the only ones that are able to offer this type of product today.

So you can probably imagine that inasmuch as our providers, our suppliers, are running into opportunities that require an integrated solution, there is only one place to go, which is RingCentral.

And one example of that is with the Pulse and Contact Center was an influential aspect in Citizen Watch becoming a RingCentral customer.

Our next question comes from the line of Will Power from Robert W. Baird.

Yes, great.

Yes, maybe just coming back to the contact center commentary.

I know, Dave, in your prepared remarks, you alluded to the fact that, that was a key part of some of the enterprise wins.

Maybe just any updated color as to contact center revenue, what the growth rate looks like and just how important is that to enterprise versus mid-market.

Is that a key selling piece and do you feel good about the pieces you have there now?

Yes.

contact center has become -- because the buyers view it as -- there's many buyers that want an integrated solution, both contact center and UCaaS.

It becomes a critical element for many contact -- many enterprise deals.

We talked about corporate travel management, very large deal, over 500 contact center seats.

And these are becoming more and more common in our largest deals and are probably more likely than not to be included in our largest deals as we move forward.

Okay, all right.

And then Mitesh, I wanted to ask you a question, too.

It's great to see that operating margin expansion.

But I guess, if I look at the full year guidance, it implies, I think it's about (technical difficulty).

I just wanted to kind of understand, is that just conservatism?

Or is that just a function of wanting to invest in some of these growth areas through the balance of the year?

No.

If you look at the operating margin and operating profit, Will, we actually took up the operating margin and actually the operating profit more than we beat in Q1.

So despite -- so we will actually invest all the upside, or at least part of it, of the upside thoughtfully in go-to-market and further fuel the fire for growth and innovation.

But despite that, we're actually raising the operating profit guidance for the full year more than the Q1 beat.

So actually, it is a virtuous cycle, and I feel -- we feel pretty good about that.

Our next question comes from the line of Catharine Trebnick from Dougherty & Company.

Mine is around the APIs.

And could you discuss where your -- or give us more background on where you view your leadership is in this area?

And then how important is this to landing new enterprise accounts?

Just more background on your philosophy and where you are on that.

Yes, the open platform is something we've been investing in for several years.

It's more than doubling year-over-year.

It's unique in the marketplace, obviously, against legacy solutions but even amongst all cloud solutions.

We have over 10,000 developers now on the platform, thousands of certified apps and the only one in the marketplace with an App Gallery that you can see on the RingCentral site.

Over 140 apps in the App Gallery that become critical for linking enterprise business workflows with communications in the organization.

And we see that it becomes a key requirement in the vast majority of our deals, of our large deals.

So it's something that's catching on in the marketplace.

Obviously, you can see it in the App Gallery.

But it becomes a critical decision factor for new accounts also.

Our next question comes from the line of Brian Schwartz from Oppenheimer.

I've got 1 question and a follow-up for Mitesh.

One question I just wanted to ask you on the solutions side.

Didn't hear too much commentary on the industry solutions, but certainly, commentary was very positive on the upselling motion for -- during the quarter.

So just wonder if you can give an update on how the industry solutions, how their performance fared.

Brian, just to clarify, when you say industry solutions is -- what exactly does that mean?

Your vertical solutions for the enterprise mid-market segment, the health care, financial services.

Yes.

So if you look at -- we are targeting certain verticals, like retail is pretty strong for us.

Financial -- fin service is very strong for us.

The tech sector is very strong for us.

And at this time, we saw very similar results across all these verticals.

And we are doubling down on the sales segmentation over time, which will attack some of these verticals even more.

And then Mitesh, following up with you here.

Question is just thinking about the leverage in the business and really just thinking about more the leverage within the infrastructure of the operations.

Certainly understand the mix shift is great economics, and there's leverage there.

But are you doing anything internally there?

Or are there opportunities that you see for efficiency as you scale the infrastructure?

Yes, sure.

So we have been -- if you look at the -- you've been following the stock for a long time, Brian, so you know when we went public, our gross margin profile was sort of mid-60s.

Our subscription margin profile now is, call it, 83%, plus or minus.

So we have been seeing enormous benefits of scale over time.

You can only go up to 100%.

And so we are there at 82%, 83%, which is best-in-class SaaS companies.

If you now exclude the transportation layer of the business, our gross margin or the pro forma gross margin on the subscription line item would be close to 85%, 86%.

So I think we are there best-in-class.

Yes, can we eke out some more efficiencies over time?

For sure.

But keep in mind, over time, in gross margin, it's a story of puts and takes here, right?

We also are going to be building out our infrastructure over time to grow even faster over time.

So that will also have a neutralizing effect.

That's one.

And number two, as Contact Center takes share, that has a lower gross margin profile.

So if you net it out, I would hold the gross margin sort of steady over time.

Our next question comes from the line of Jonathan Kees from Summit Insights Group.

I have 2 questions.

One is more strategic, the other one's housekeeping.

And Vlad kind of started touching on it but didn't answer the question that I have directly.

Relative to your Collaborative Contact Center, it sounds like you're going to be pushing that more than your inContact solution, right, going forward?

Or is that just still a very viable option in terms of what your sales force are going to be pushing out in terms of a direct -- their direct effort?

I guess I'm trying to see how that fits with your inContact partnership.

Yes.

So I think question is on the Collaborative Contact Center, which we mentioned earlier and announced last quarter.

The Collaborative Contact Center is our current contact center solution that we partner with.

But it incorporates over the team messaging and collaboration.

So it's really bringing an integrated suite together and allowing that team messaging collaboration to be accessible by agents as well as elements of that contact center being accessible to the broader organization.

So it's really an enhancement of our current relationship, an enhancement of that product.

So that's how we continue to differentiate our offering and provide this interest that customers really have in the integrated suite across all our products, which is we see this combination happening more and more with team messaging, PBX, video and web meetings and contact center.

Okay.

All right.

That was helpful and clarifies in terms of the role and, yes, how the previous partnership plays in terms of what you're offering now.

The other question I have is just more housekeeping.

I guess, it's a reflection in terms of the traction that you're getting with the mid-market and enterprise.

Can you update us in terms of the number of 7-figure deals that you had for the quarter and then also like the Contact Center as a percentage of mid-market enterprise new business?

I'm sorry if you already did that.

No worries.

We can -- we did not, but I can take a shot at that.

So 7-figure deals, we've actually flagged and signaled that we are, Jonathan, moving away from the 7-figure deal because it's a choppy metric, and we actually gave a more relevant metric, which is our ARR metric for enterprise.

And that ARR metric was $100 million business, grew triple digits.

But to sort of give you color on the TCV deals, we saw no slowdown in these deals even despite the Q1 seasonality.

So that's one.

And in terms of the contact center, we have not given the exact percentage out for the mid-market, but it's -- maybe in the high teens of bookings is the way to think about it.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to management for closing remarks.

Thank you all for joining, and hope to see all of you at our Analyst Day on June 14 in New York.

Thanks a lot.

This concludes today's conference call.

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