RingCentral Inc (RNG) 2013 Q4 法說會逐字稿

Greetings, and welcome to the RingCentral fourth quarter 2013 results conference call.

(Operator instructions)

I would now like to turn the conference over to your host, Bob Larson. Please go ahead.

Thank you.

Good afternoon, and welcome to RingCentral's fourth-quarter and full-year 2013 earnings conference call. Joining me on today's call are Vlad Shmunis, Founder, Chairman and CEO, Clyde Hosein, Chief Financial Officer, and David Berman, President. Our format today will include prepared remarks by Vlad, Clyde and David, followed by Q&A. The primary purpose of today's call is to provide you with information regarding our fourth-quarter and full-year 2013 performance, in addition to our financial outlook for our first-quarter and full-year 2014.

Some of our discussion and responses to your questions may contain forward-looking statements, including statements regarding our expected financial results for the first quarter and full year 2014, our future plans, prospects opportunities, trends in the business communications market, our expectations regarding our current and future partnerships and alliances, our growth strategies, future market position, expected growth, our estimates about the current and potential future markets in which we may compete, and our expectations about current and future service offerings.

Theses statements are subject to risks, uncertainties and assumptions. Actual results may differ materially from our statements and projections for variety of reasons, including, but not limited to, general economic and market conditions, such as the global macroeconomic environment, and the effects of competition and technological change, and matters specific to our business, such as 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 10-Q for the quarter ended September 30, 2013, and filed with the Securities and Exchange Commission, and is incorporated by reference into today's discussion. Should any of these risks or uncertainties materialize, or should any of our assumptions as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual Company results could differ materially from these forward-looking statements.

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 fourth-quarter 2013 earnings press release, our non-GAAP to GAAP reconciliation, our periodic SEC reports, the webcast replay of today's call, and to learn more about RingCentral.

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

Thanks, Bob.

Welcome, everyone, and thank you for joining us for on our fourth-quarter and full-year 2013 earnings call. I am happy to report another strong quarter, capping off a terrific year for RingCentral. Revenue for the fourth quarter was a record $45.3 million, up 37% year-over-year. For 2013 as a whole, total revenue was $160.5 million, up 40% versus 2012. Growth was again driven by RingCentral Office with annualized exit monthly recurring subscriptions of $112.3 million, up 67% year-over-year.

Clyde will expand on our financial results and provide guidance later in the call, but these results provide additional validation that our innovative cloud-based approach is successfully disrupting the very large business communications market. The RingCentral solutions are addressing the rapidly changing needs of modern workers in ways the legacy hardware simply cannot.

The way people work has changed. They are increasingly working from multiple locations and using multiple devices, particularly BYOD mobile phones and tablets. Our approach is mobile first, as we view mobile devices as viable alternatives to traditional business phones.

To further cement our leadership in this key category, we have recently introduced RingCentral Office Enterprise edition, with RingCentral meetings. Which is the industry's first mobile-centric integrated cloud communications platform with HD video and web conferencing.

This a solution works with iOS and Android smartphones and tablets, as well as traditional laptops and desktop PCs. Another way in which we differentiate is with our go-to-market approach. We are currently the world's only pure-play cloud communications provider with a sizable direct customer base, as well as a scaled deployment with a major carrier, namely AT&T.

To that end, we are extremely pleased to announce today that RingCentral has been chosen by TELUS, a leading Canadian carrier with over a $11 billion in revenues to deliver a cloud-based communication solutions to address the rapidly-changing needs for these business customers. We are working closely with TELUS to bring the solutions to the Canadian market later this year.

We have built a multi-tenant fully-redundant carrier-grade SaaS platform. It is a high availability, layered, open at [air] architecture, that is device and transfer independent. Next to our people, our platform is our most important asset. We continue investment into innovation. In Q4 of last year, we were issued seven new US patents.

In summary, 2013 was an outstanding year for RingCentral. We grew revenue 40%, and improved non-GAAP operating margin by 7 points. We completed a successful IPO, and were added to the Russell 2000, 3000 and Global Indexes. We won TMC 2013 Internet Revenue Product of the Year and Gold Stevie awards, and strengthened our leadership team with additions of Dave, Clyde and others.

We are the largest and fastest-growing pure-play cloud business communications player today, and we will continue to invest in growth, given our extremely attractive market and unit economics. With our momentum and our leadership positioned in this very large and ripe for change business communication business market, I firmly believe that our best days are still ahead of us.

I will now turn the call over to Dave, to provide additional color on our growth strategy, and some of our recent wins.

Thanks, Vlad.

When we spoke to you last quarter, we described our three-pronged growth strategy, continuing to move up market to reach a larger enterprises, adding additional distribution channels to scale our reach more quickly, and expanding globally through direct and indirect channels.

I am happy to report that we have made strong progress in all three areas, and continued momentum for our office business. Our annualized office exit monthly recurring subscriptions continues to grow over 65% year-over-year, and represents over 90% of our net new business.

First, moving up market. We continue to gain traction with larger customers. To continue that momentum, we made a number of channels to inside sales model, including a dedicated focus on larger customers, and we are rapidly adding quota-carrying salespeople.

We have also increased our investments in our Denver support center to better service these customers. In addition, we have made our product portfolio more attractive to larger customers with the launch of RingCentral Office Enterprise Edition with RingCentral meetings. So now on top of our existing voice, SMS, and fax capabilities, we are excited to be able to provide high-quality video and web meetings that are fully integrated into our platform.

RingCentral Meetings is a multi-point, high definition video and web conferencing solution, both for smart phones, tablets and computers. Again, we are bringing a solution that is mobile-centric to address the rapidly expanding BYOD needs of enterprises.

RingCentral Meetings offers video and web conferencing for up to 25 users at a time, with an active speaker spotlight. Our Enterprise edition is priced about $45 per user per month. That includes our full suite of cloud business communication services, as well as RingCentral meetings. Our pricing is disruptive. For comparison, stand-alone online meeting products from leading vendors cost nearly $50 per user per month.

Our second growth initiative is expanding distribution channels. We continue to see outstanding growth from our partnership with AT&T, and with our value-added reseller network. We added Ingram Micro cloud to our VAR network in 2013, and we are very pleased with the progress to date.

To that, we are now excited to add our relationship with TELUS. We will be working closely with TELUS over the next several months to launch the services in Canada later this year. We are very optimistic about the potential for growth from this relationship.

Our third growth initiative is expanding globally. We launched RingCentral Office in the UK in October. While it is still early, revenue growth is exceeding our expectations. More importantly, we have implemented what we have learned in the marketing of RingCentral Office in the US to rapidly scale in the UK. We are seeing a ramp in the UK that looks similar to what we saw when we first launched RingCentral office in the US. Based on these early results, we are confident about the future in the UK, and the rest of Europe.

To highlight our progress with our growth strategy, let me share some specific customer examples. Naked Wines, with over 60 users is one of our new UK customers. With offices in the UK and Napa Valley, California, they needed a solution that could be rapidly deployed, to easily connect multiple locations on both continents, as well as integrate with their CRM system. With RingCentral's cloud solution, their customers can now reach any Naked Wines employee, no matter where they are located.

TruGreen Landcare is one of the largest providers of commercial landscaping services in North America, with more than 500 users, across 65 offices in the US and Canada. They needed a solution to connect offices and field employees. RingCentral Office enables them to transfer calls between locations, eliminates multiple vendors and bills, and removes the complexity and maintenance of hardware in each location. TruGreen was excited about our mobile capabilities, and seamless connectivity via extension dial-in to their stores.

John Barbados is an American Men's fashion designer, with more than a dozen retail locations in North America. They replaced an aging Nortel PBX with a three-year contract for RingCentral Office, for more than 100 users to support rapid growth, and to connect their offices and retail locations. Now they have a easy to manage and scalable solutions.

Lastly, Motion Recruitment, a national IT staffing firm is a company we have highlighted before. We noted at our IPO roadshow in September, that they had more than 500 users. It has been a successful partnership, and they have expanded their use of RingCentral Office to almost double the users since then.

These highlights represent just a few of our customer success stories from the past quarter. As Vlad mentioned, we continue to execute well against a large and growing market opportunity, and our team is very focused on our strategy to deliver on our goals in 2014 and beyond.

Clyde will now provide more color on the quarter, and our financial guidance for Q1 and full-year 2014.

Thanks, Dave.

As Vlad noted, revenue for the quarter was $45.3 million, up 37% from Q4 last year, and up 8% versus the prior quarter. This was higher than our previous guidance of $42.5 million to $43.5 million. Within total revenue, service revenues were $41.4 million, up 35% versus last year, and 9% from Q3.

Product revenues were $4.0 million, up 66% year-over-year, and consistent with Q3. Total Company annualized exit monthly recurring subscriptions grew to $173 million, up $13 million sequentially, and 39% year-over-year. As Vlad noted, Office annualized exit monthly recurring subscriptions grew to $112 million, up $12 million sequentially, and 67% year-over-year.

RingCentral Office remains more than 90% of our net new recurring subscriptions, and a key driver of our growth. Lastly, our overall net monthly subscription dollar retention rate in the quarter remains strong at 99%, consistent with last quarter, and the same period last year.

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

Service gross margins improved to 69% in the quarter, up about 1 point from the period last year, and last quarter. Consolidated gross margins including phones were 63%, consistent with last year, and up 1 point from the prior quarter.

Sales and marketing expenses were $19.4 million for the quarter or 43% of revenues, versus $18.6 million or 44% of revenues in Q3. This compares to $14.8 million or 45% of revenues in Q4 last year. We will continue to invest in sales and marketing, as the payback on this spending remains strong.

R&D expenses were $8.5 million in Q4 or 19% of revenues, versus $7.8 million or 19% of revenues in Q3, and $6.6 million or 20% of revenues last year. The year-over-year increase is primarily from an increase in the engineering headcount, as we worked to extend the functionality of our platform.

G&A expenses were $7.9 million in Q4, or 17% of revenues, compared to $6.9 million, or 16% of revenues in Q3. This compares to $4.7 million, or 14% of revenues in Q4 last year. The increase in G&A reflects the increased costs of being a public company. Non-GAAP net loss was $8.5 million, compared to a loss of $7.8 million in Q3, and $6.0 million in the year ago period.

Our average basic share count for the quarter were 62.1 million. Earnings per share was a loss of $0.14, compared to a loss of $0.26 per share in Q4 of last year. On a GAAP basis, our net loss was $13.4 million, or $0.22 per share. The difference between our GAAP and non-GAAP results includes $3 million or negative $0.05 per share in stock-based compensation, and $1.8 million or negative $0.03 per share in accelerated end of term fees associated with the refinancing of our debt.

We expect this refinancing to reduce annual interest expense going forward, by about $1.3 million annually. We ended the quarter with cash and equivalents of $116.4 million, compared to $25.5 million at the end of the prior quarter. The increase includes roughly $99 million of net proceeds from our IPO, which we will receive in October. For the quarter, cash flow from operations was negative $3.2 million.

Turning to full-year 2013, revenue grew 40% to $161 million, driven by growth in RingCentral Office. Service gross margin were 68%, up 2 points from last year, primarily from the reductions in transport costs, demonstrating the leverage in our business model. Consolidated gross margins were 62%, up 1 point from last year.

Sales and marketing expenses were $71 million for the year or 44% of revenue, versus $53.9 million, or 47% of revenue in 2012. R&D expenses were $31.9 million in 2013, or 20% of revenue, this compared to $22.6 million, or 21% of revenue last year.

G&A expenses were $27.0 million, or 17% of revenue in 2013, versus $22.1 million, or 19% of revenue last year. This results in non-GAAP operating margin improvement of 7 points year-over-year, from negative 26% in 2012, to negative19% in 2013.

Non-GAAP net loss was $33.6 million in 2013, versus $31.3 million last year. Non-GAAP net loss per share improved from a loss of $1.40 per share, to a loss of $1.01, as a result of the higher weighted average basic shares, which were 33.2 million in 2013, compared to 22.4 million in 2012. On a GAAP basis, our net loss was $46.1 million or $1.39 per share.

The difference between our GAAP and non-GAAP earnings of negative $0.38 per share includes stock-based compensation of $7.5 million, IT-related and legal matters of $3.1 million, and one-time debt refinancing expenses of $1.8 million.

Now to our expectations for the first quarter and full year 2014. For the first quarter, we expect revenue of $46.5 million to $47.5 million, or growth of 31% to 34% year-over-year. We expect non-GAAP operating margin of negative 18% to 20%.

The sequential change is consistent with seasonal patterns, and is primarily by driven the impact of higher tax and benefit costs in Q1 versus Q4, typical of what one would expect at the beginning of the year. This should lead to a non-GAAP EPS loss of $0.14 to $0.16 per share, based on 62 million weighted average shares outstanding.

For the full-year fiscal 2014, we expect revenue of $202 million to $208 million, or growth of 26% to 30% year-over-year. Non-GAAP operating margin of negative 15% to 17%. This should lead to non-GAAP EPS loss of $0.50 to $0.55 per share, based on 67 million weighted average shares outstanding.

In summary, our business has grown very rapidly, and has continued to demonstrate leverage. We have an efficient customer acquisition engine, with attractive unit economics, with $8 of revenue and $5 of contribution margin generated for every dollar we spend on sales and marketing. Given these very attractive unit economics, and a multi-billion dollar market that we are disrupting, I have to agree with Vlad that our best days are ahead of us.

I will now turn the call over to the operator for Q&A.

Thank you.

(Operator instructions)

Our first question comes from Greg Dunham from Goldman Sachs.

Hello, yes, thanks for taking my question.

I think first off, congratulations on the TELUS deal. I know that these distribution partnerships was -- has been a focus of yours. How big do you think this distribution category can be for you, in terms of what is the mix going to be down the line, three years, five years out, in terms of direct versus indirect?

Hello, Greg. Vlad here, good to hear from you.

So look, we are very, very excited about our continual success and progress with major Tier 1 carriers. As you know, we have the fortune of having a long-term relationship with AT&T. That has been very fruitful for us. And what we have with TELUS is, really a very important second proof-point of our ability to work closely with major carriers. And in case of TELUS, proof-point -- first proof-point of our ability to work with -- closely with international carriers.

So quite excited. It is obviously too early for us to make any projections vis-a-vis that relationship, the product will only ship later this year. But I can tell you that, based on the success of our -- and progress with our -- of our engagement with AT&T, we are quite optimistic.

Okay, great. And then, switching gears a little bit. I know that it is very recent, the Office enterprise edition, but any initial feedback you have gotten from customers on that release?

So the TELUS release, only went out today.

No, not TELUS, not TELUS. I was just talking about the new Office enterprise edition with meetings. And kind of -- I know that is also very new, so you might not have much data. But maybe perhaps talk about the data that you have to date, and what you think this opportunity can do from a pricing standpoint?

Right. Yes, sorry, I misheard you.

So as you mentioned, Greg, the enterprise edition has only been announced a couple of weeks ago. We have certainly received very strong positive sentiment from the customer base. Again, as in my prior answer, it is too early to tell, as far as our ability to disclose any actual sort of numbers at this point. It has only been a couple of weeks.

But there is a lot of interest out there, and I really want to stress that it is truly a revolutionary product. So this is the first time that we are aware of, where you have a cloud-based phone system, be extended into our cloud-based integrated communication suite which is mobility-centric. So the fact that we are now, as part of our enterprise edition, that we are able to run HD video conferencing, as well as web conferencing and do all of that for mobile devices, we believe is quite unique in the industry. So we are quite hopeful, that there will be strong adoption for this product.

Okay. Thanks.

Thank you. Our next question comes from Kash Rangan from Merrill Lynch. Mr. Rangan, your line is live. You may be on mute. If you are currently on mute, please unmute your phone line. We will go to our next question. Our next question comes from Terry Tillman from Raymond James.

Hello, this is [Eric Lemus] on for Terry. Thanks for taking my question. You talked about your traction that you are seeing in the UK business. Do you have any early commentary of what you are seeing in the UK, in terms of the demand environment there? And then, as far as deal sizes, and sizes of customer dynamics, is that similar to what you are seeing in the US business?

Yes, hello, this is Dave. Yes, the UK has launched very nicely. We are very happy with the ramp that we are seeing there. Again, it is really early, we just launched in October, but we are seeing similar traction that we had when we first launched Office in the US.

So we are pleased with the results, and we are going to continue to grow that business.

Okay, great. And then on competition, and specifically on how often do you see Microsoft Lync in competitive deals, and what about carriers coming in with a competitive solution? Is that something that you are seeing or hearing?

Right, so Vlad here.

So let me take the second part of the question first. So as you can tell, we view carriers is a natural general partners, and people to work with. So with AT&T and now TELUS, we actually have two major carriers offering RingCentral products and services.

So it is true, that there are other non-RingCentral-based solutions out there. But as you can tell by our growth, it is substantially, almost by a factor of two, exceeds that of the nearest competitor. And I think this is just another testament of our ability to win and compete extremely effectively, based on ease of use, ease of deployment and frankly, the overall value that we provide.

So we are certainly focusing around there, as well as winning additional business from the same carriers. Now as far as Microsoft Lync, so we are certainly aware of its presence. But what I want to really make sure is that folks understand, is that as we sit here today, Lync's cloud-based offering really does not do what we do. It does not include an integrated voice component. So no, we are not running into them at all.

Where Lync is being utilized is basically, with on-site deployments, and similar to traditional PBXs. And as you all know, our whole thesis is that we can compete with traditional hardware or software-based solutions, andquite effectively we are using the cloud. But short answer is that, we don't see that much of them at this point.

Okay, great. Thanks for the color.

Thank you. Our next question comes from John DiFucci from JPMorgan

Thank you. I have a couple of questions on the partnerships. First on the TELUS, is there any exclusivity based on customer segment or geographic region with this agreement?

Yes, hello, John. Vlad here. So look, it's very difficult for us to go into sort of specifics of the contractual relationship. Obviously that is quite proprietary between us and TELUS.

But again, what I can say and reiterate is that, we are extremely excited to be working with TELUS, which is really one of the leading carriers in Canada. It is a company with over $11 billion in revenue, with very strong concentration and following in the business market. And from, where with it, we really could not have hoped for a better partner. So we think that we got exactly what we needed out of this relationship at this point.

Okay, got it. Thanks. And Dave said that you are seeing outstanding growth from AT&T, and it has been mentioned a few times in the Q&A here. But can you give us any more detail what that really means here? Even any detail at all that you can share with us?

It is one of our fastest growing channels. It is, as far as the offerings from a major carrier in the US, we believe it is an extremely well-differentiated offering. It is being accepted very, very well by the customer base.

And I think that is all that we can really disclose at this point. Again, just to reiterate that, we are very happy with the relationship. And as you know, I do believe we mentioned on the last call, it has been a multi-year relationship for us, and we continue seeing very strong momentum with it.

Great. Thanks, Vlad. And if I might, just one more question.

Clyde mentioned that you are going to continue sales and marketing spend, because you see that the payback is very strong. Just curious, have you seen any change in productivity, sales and marketing productivity, sort of like a measure of new business versus sales headcount? Have you seen any change versus historical trends?

We are continuing to ramp the headcount, and we ramp productivity and headcount growth at the same time. So as we continue to push that market, we are going to see larger deal sizes. We are excited about that opportunity, and you can tell by the wins that we announced on the call earlier, that I think we have got some big wins, and we are going to continue to push up market.

I am sorry, just so I am clear or I understand that. Did you say productivity was improving also, based on just that you are signing larger deals, so are you seeing more new business per headcount? Or has the new business that has netted in dollars?

Yes. No, look -- so look, we are moving up market, because there is no doubt about that. As you can tell by the results, Office, which is our up market product, is already over half of our revenues overall. Well over half, and over 90% of of our new businesses is coming from Office. Within Office, I can tell you that our up market penetration and bookings are outpacing those from smaller businesses. So it is all moving in the right direction.

To your question, so what is the productivity like, given this environment, I think the very good news is, we are able to hold approximately a similar ratio between our acquisition costs, and accounts value to us. Now there is a dynamic that we are dealing with longer sales cycles. They are so very short in comparison to, maybe, some of these other SaaS providers.

But they are slightly longer, than what we are used to. But on the other hand, the customer value is meaningfully larger, as well. So net-net, is we are able to attract larger, stickier customers, at about the same efficiency that we are used to, which we think is very, very good news for us.

Yes, that is very helpful, Vlad. Thanks a lot, nice job.

Thank you very much.

(Operator instructions)

Our next question comes from Mike Latimore from Northland Capital Markets.

Great. Thanks a lot. Very nice quarter. You just touched on the sales cycle there. What is sort of average sales cycle nowadays?

Yes, in the core business and the SMB business, we have a very short sales cycle, less than two weeks. In the up market, the sales cycles are longer, because of the complexity of the sale, the number of people involved. But we are very confident in our ability to move up market, and I haven't seen the sales cycle move up that much. So we build our products so they are easy to use, easy to sell, with the latest cutting-edge technology.

Great. And then, at TELUS, was the competitive landscape similar to what you saw at AT&T a few years ago?

I am sorry, could you repeat the question?

Yes, was the -- were the vendors vying for the TELUS deal similar to the ones that you saw AT&T a few years ago?

Yes, look, first, there is only so much we know. I can tell you, it was a competitive environment. Obviously, we won, so I think that is the most important part.

And again, I really just want to maybe reiterate one more time, what really makes us unique -- and I think both AT&T and now TELUS seem to be recognizing it, is we are the only cloud services provider, both with a meaningful direct customer base, as well as known at scaled deployments with major carriers.

And that is quite a differentiated position. Because what we have to bring to the relationship is not just the core technology, but really understanding. And for every deep experience with the entire deployment cycle with -- we understand customers sort of pain points, beyond just the features that need to be delivered. And that sets us off fairly favorably, against the rest of the field.

Great. And just last one on the UK, and you have been there a short while now. Any difference on how you market, or go to market or your sales strategy in the UK? Any nuances there that you see relative to what you have done in the US?

The market is very similar. So we are using the same integrated marketing and sales techniques, and we are getting very good traction early. So we are real pleased with the results, and the sales and marketing efforts in the UK.

Okay, thanks.

Thank you. Our next question comes from Kash Rangan from Merrill Lynch

Hello, thank you for taking my question. Can you talk about how the scalability of your product is evolving? Are you able to knock down 1,000 plus seats, and how far are we considerably from going after the enterprise market, if that is something on your road map? And also I think you had that recent announcement of the video capabilities in your product. Can you give us a feel for how big that could be, in terms of our product cycle driver? Thank you.

Yes. Hi, Kash. Vlad, here.

So we don't see a natural limit. It is true that our largest commercial customer is just shy of 1,000 seats, not very much I should say. So there is not any type of a ceiling there. I can share with you that RingCentral itself, has substantially over that number of seats running on our new platform. So we know that there is no sort of natural limit. And we are seeing continued interest and pull from the up market.

Now as Dave mentioned, these are longer sales cycles. They are different sales cycles. It is -- you are not dealing with company owners anymore. There is an IT department involved and sort of -- in many cases this more often RFP, RFQ type process. But we continue very serious investments into the up market opportunity.

And again, going back to what I think Dave and both -- I both said, there is a continual focus on building up the sales force, as well as the support of the organization, which is capable of supporting these larger accounts. And you already mentioned, with the enterprise edition and RingCentral meetings, where we are now branching into integrated communications, as opposed to for our cloud-based phone systems. So that is definitely something that we felt was required for the up market. So we just see continual growth and traction there.

Thank you. I will now turn the floor back over to our speaker Vlad Shmunis for closing comments.

Thank you.

Well, I want to thank you all for joining us on our fourth-quarter earnings call today. We are all quite proud of having closed out a successful year, and to enter the new year with a solid business momentum. We appreciate your interest in our company, and we look forward to providing you further updates in the future.

Thank you very much.

Thank you, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.