RingCentral Inc (RNG) 2014 Q3 法說會逐字稿

Greetings and welcome to the RingCentral Inc., third-quarter 2014 earnings conference call.

(Operator Instructions) A question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Clyde Hosein, Executive Vice President and Chief Financial Officer for RingCentral. Thank you, Mr. Hosein, you may begin.

Thank you. Good afternoon and welcome to RingCentral's third-quarter of 2014 earnings conference call. I am Clyde Hosein, RingCentral's Chief Financial Officer. Joining me on today's call are Vlad Shmunis, Founder, Chairman, and CEO; and David Berman, President. Our format today will include prepared remarks by Vlad, David, and I, followed by Q&A.

The primary purpose of today's call is to provide you with information regarding our performance for the third-quarter of 2014, our financial outlook for our fourth quarter, and an update on our full- year 2014 forecast.

Some of our discussion and responses to your questions may contain forward-looking statements, including statements regarding our expected financial results for the fourth quarter and full year 2014, our future plans, prospects, and opportunities, trends in the business communications market, our expectations regarding our current and future carrier and other reseller relationships, our growth strategies, 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, and customer demand for an 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 June 30, 2014, and filed with the Securities and Exchange Commission and is incorporated by reference into today's discussion. We disclaim any obligation to update this information contained in our forward-looking statements, whether as a result of new information, future events, or otherwise.

I encourage you to visit our investor relations website at www.ir.ringcentral.com to access our third-quarter of 2014 earnings press release on 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.

Welcome, everyone, and thank you for joining us today for our third-quarter 2014 earnings call. I'm pleased to share with you that the combination of our differentiated service offerings and growth investments paid off again in the third quarter. We continued to deliver strong revenue growth, particularly with our office product and with larger customers. In addition, we also showed significant improvement in both gross and operating margins in the quarter.

These items combined to produce results that exceeded our previous guidance on both the top and bottom line. We saw strong results, once again, from our flagship offering, RingCentral Office. The annualized exit monthly recurring subscriptions from RingCentral Office grew 53% year-over-year to approximately $154 million.

While Office overall showed strong growth, the portion coming from customers with 50 units and greater, continued to grow by more than 100% year-over-year. These customers represent a meaningful portion of our new business activity and accounted for about 20% of our new RingCentral Office subscriptions bookings in Q3. Overall, our total revenue grew 36% to $56.9 million.

We recently launched several product enhancements designed to support our move up market, improve end-user experience, and expand our opportunity in the healthcare industry. In terms of upmarket capabilities, we introduce user templates, powerful analytics and recordings, multilevel IVR, and integration with [down desk]. We also revamped our end-user applications, including real-time presence on the mobile applications to provide a substantially better end-user experience and increase productivity.

In addition, this quarter we released a HIPAA compliant solution which will help us to better serve customers in the healthcare verticals. Our vision for innovative and easy to use business communications solutions is helping to drive the results reported today, along with increasing recognitions from the industry. In the recent report, Gartner positioned us furthest along the completeness of vision axis in the most recent, Magic Quadrant for Unified Communications as a Service.

In addition, our mobile-first strategy and its impact in the cloud-based business communications market was highlighted recently as we received the global excellence award for outstanding product service. Finally, RingCentral Meetings earned a 2014 Internet Telephony TMC Labs Innovation Award.

We believe that our mobile-centric approach, our diverse functionality, ease of use, and carrier great performance, provide us with significant differentiation versus our peers. As we move forward, we'll work to press these advantages as we [invert] in both our direct and indirect efforts to reach business users with our cloud-based solutions both here and abroad.

We're serving a very large underpenetrated market. We estimate that the replacement market opportunity for business communications in North America alone is worth $15 billion, with the global replacement market worth several times bigger. Yet we believe that the cloud penetration of this market remains very low, giving us a large run rate for future growth ahead.

We're the largest and fastest growing pure play cloud player in the business communications market. We continue to be encouraged by our progress as we look to grow both our office business and our presence with larger customers. I'll now turn the call over to Dave to provide additional color on our growth strategy and some of our recent wins.

Thanks, Vlad.

Our growth strategy remains focused on three main components. Expanding upmarket to larger enterprises, adding additional distribution channels, and growing our presence internationally. We made progress on all three fronts in the past quarter. Let's dive into each one.

First, we continue to expand upmarket with larger client wins in the quarter. The enhancements we've made to our sales organization earlier this year have allowed us to drive significant growth in customers with 50 users and above, while still growing our business with smaller customers. As Vlad indicated earlier, we demonstrated meaningful evidence of expanding upmarket as office MRS from customers with 50 users and above grew by over 100% year-over-year again. And this category, represented about 20% of our new office bookings for the quarter.

One example of a recent large customer win was with Barrel Automotive, a large automotive dealership in the Pittsburgh area with 11 locations. Barrel was facing a number of problems with their existing on-premise systems, including multi-location complexity, cost, and frequent outages.

More importantly, the lack of reliability and capabilities inherent in their legacy system were impacting the experience of the customers and, ultimately, their business. Barrel now plans to take advantage of our advanced mobile functionality to enable its sales people to connect with customers while they're away from their desks as well as deploying our [cell] phone throughout the service departments in each dealership allowing for an enhanced customer experience when scheduling appointments. They'll have RingCentral Office deployed across all of their locations rather than having to manage multiple providers. This multiyear contract encompassed 550 users.

Another large win for us in the quarter was Tri-Valley Learning, an organization based in the San Francisco Bay area. Tri-Valley was looking for a solution to support not only a centralized system for 10 different charter schools but also to empower their teachers to use modern communication tools to connect with parents and students over text, video, and webinars.

As we often hear, their existing on premise legacy systems were not able to meet these requirements. The initial contract will support more than 250 users with the potential to seamlessly support many more as they continue to grow. We will continue to add resources dedicated as customer-tier going forward based on the traction we're seeing.

Second, distribution channels. We saw further broad-based success with our channel business in the third quarter. Our indirect channels, including carriers, [bars], distributor partners, now account for nearly 20% of our monthly recurring subscriptions. A good example of a customer we acquired through our relationship with AT&T is a publicly traded national retail chain with hundreds of stores.

As you can imagine, coordinating phone service across that many locations involved a lot of inefficiencies and time spent dealing with multiple vendors. The customer was looking to consolidate their communication solutions under a single vendor and provide the latest functionality to their users as well. This rollout has now reached more than 700 users with more planned in the future.

On the carrier front, we remain on target to launch with TELUS this quarter, and we look forward to building a successful relationship with them over time. In addition, we are making progress with our launch plans in the UK with BT for the first half of 2015.

Third, global expansion. We are pleased that the investments we've made on the direct side in the UK are gaining traction and we're seeing a growing contribution from partners there as well. In addition, we've extended our RingCentral Office solution with the introduction of RingCentral Meetings in the UK.

We will continue to invest to support our growth in this market given the results we've seen to date. So overall, we continue to execute well across our strategic priorities. I'm encouraged by the momentum we're experiencing with these initiatives given the large opportunity Vlad discussed a moment ago. I'll now turn the discussion over to Clyde.

Thanks, Dave. Overall, revenues for the third quarter were $56.9 million, up 36% year-over-year and 8% sequentially from Q2 as our multivector growth strategy continues to produce strong results. This was above our previous guidance of $55 million to $56 million. Within [further] revenues, service revenues grew to $52 million, up 37% year-over-year, and 9% sequentially, while product revenues grew to $5 million and remains roughly 9% of total revenue.

Total company annualized exit monthly recurring subscriptions grew to approximately 220 million, up 37% year-over-year and 8% sequentially. The annualized exit monthly recurring subscriptions for our RingCentral Office product grew to approximately $154 million, up 53% year-over-year and 10% sequentially. Our overall net monthly subscription dollar retention rate was over 99% in the third quarter with office net monthly subscription dollar retention above 100%, consistent with the past several quarters.

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

Service gross margin improved to 72.1% in the quarter and for the first time passed the 70% level that is typical of other SaaS software providers. This was up 360 basis points from the 68.5% in Q3 of last year and up 230 basis points in the 69.8% in Q2 of this year. This significant improvement in margin brings us closer to achieving our target margins for service revenue in the range of 75% to 80%.

We are continuing to see leverage from prior infrastructure investments as well as our initiatives to lower our communication costs. Consolidated gross margins, which includes phones, were 66.5%, up from 62.2% in Q3 of last year and up from 63.6% in Q2 of this year. Sales and marketing expenses was $25.3 million for the quarter, or 44% of revenues. This compares to $18.6 million or 44% of revenues in Q3 of last year and $24.4 million or 46% of revenues in Q2 of this year, an improvement of 180 basis points sequentially.

We demonstrated improved leverage in sales and marketing, even while expanding our penetration to larger customers. As Dave mentioned earlier, we have been pleased with early results from these initiatives. However, I would like to remind you that the time required to close these larger deals is often longer than sales cycles for smaller customers. The positive trade-off for these longer cycle times should result in larger deal sizes and stickier customers, an equation that drives higher long-term customer value.

We'll continue to invest in sales and marketing both here and abroad as the payback on the spending remains strong. We continue to see each dollar of sales and marketing invested contributing $8 of lifetime revenue and $5 of lifetime contribution margin over the projected life of a customer. R&D expenses were $11 million in the third quarter or 19% of revenues. This compares to $7.8 million or 19% of revenues in the third quarter of last year and $10 million or 19% of revenues in the second quarter of this year.

G&A expenses were $8.2 million in Q3 or 14% of revenues. This compares to $6.9 million or 16% of revenues in Q3 of last year and $8.1 million or 15% of revenues in Q2 of this year. We had an operating loss of $6.6 million, which equates to an operating margin of negative 11.6%, a significant improvement of [130] basis points from the same period a year ago and [520] basis points from the last quarter.

This was well ahead of our guidance of negative 14% to 16%. We expect further improvement going forward as evidenced in the guidance I will provide shortly. Non-GAAP net loss was $7.8 million, similar to a loss of $7.8 million in Q3 of last year and compared to a loss of $9.4 million in Q2 of this year. Non-GAAP net loss per share was $0.11 based on a share count of 67.8 million shares. This is ahead of our guidance range of a loss of $0.12 to $0.14 per share.

You should note that our earnings per share was negatively impacted by about $0.01, mostly due to currency translation effects on our foreign balance sheet. This amount is embedded in our other income line. On a GAAP basis, our net loss was $12.4 million or $0.18 per share. The difference between our GAAP and non-GAAP results includes $4.2 million in stock-based compensation.

We ended the quarter with cash on short-term investments of $149.4 million compared to about $151 million at the end of the prior quarter. For the quarter, cash flow from operations was positive $3.9 million compared to negative $8.2 million for Q3 of last year and negative $8.5 million for Q2 of this year. As opposed to Q2 of this year, where cash flow from operations was negatively impact by some timing issues, in the third quarter we received a positive benefit from a few timing related issues included the funding of our ESPP tax withholding and Accounts Payable.

While we are not providing specific guidance for operating cash flow, you should expect operating cash flow to be negative in the upcoming quarter. Despite these quarterly variations, the cash flow from operations in the second half of this year should be meaningfully better than the first half of this year.

Turning to our guidance for the fourth quarter and full-year 2014. For the fourth quarter, we expect revenue of $59.5 million to $60.5 million or growth of 31% to 33% year-over-year. We expect non-GAAP operating margin of negative 9% to 11%. This should lead to a non-GAAP EPS loss of $0.09 to $0.11 per share based on $68 million weighted average shares outstanding. Accordingly, for the full year FY14, we now expect revenue up $217.5 million to $218.5 million or growth of 36% year-over-year.

This is an improvement compared to our prior guidance of revenue up $213 million to $216 million and reflects both our performance in Q3 and the continued momentum we see in our business. Non-GAAP operating margin of negative 13.5% to 14.5%, an improvement over our prior expectations of negative 14% to 16%. And a reflection of the continued leverage we see in our model.

This should lead to a non-GAAP EPS loss of $0.49 to $0.51 per share based on 67 million weighted average shares outstanding compared to our prior guidance of a loss of $0.50 to $0.54. Overall, the business continues to perform well as we were once again able to demonstrate a combination of growth and significant operating leverage in the quarter. In addition, our RingCentral Office business posted robust growth with the 50 user and above segment more than doubling year-over-year.

Our targeted gross spending has allowed us to gain share while adding large customers that will produce significant lifetime value for the Company. In particular, we are pleased to be able to deliver strong industry-leading growth while making substantial progress to us break even and ultimately our target profitability profile. We believe that the business is well-positioned as we look to close out the year and look forward to capitalizing on the opportunity in front of us.

I'll now turn it over to the operator for the Q&A portion of this call.

Thank you.

(Operator Instructions)

Terry Tillman, Raymond James.

Hello. Good afternoon. Thanks for taking my questions and nice job on the quarter.

Don't know if this is for Vlad or David, but in terms of the upmarket move, you gave additional commentary or additional metrics on just the size now, the 50 seat-plus or 50 user-plus type deals, so that was helpful. I'd love to get an update on just where we are in terms of the size of the sales force focused on upmarket and maybe the enhancements earlier in the year in terms of the sales organization. Are there still more benefits to be seen from that enhancement or alignment changes? Thanks.

Hi, Terry. This is Dave.

So we're pleased with the growth that we've seen upmarket as we mentioned earlier, the 50 plus segment is growing 100% year-over-year. The enhancements that we made to the sales force earlier this year are paying dividends, and we're very pleased with the ramps, the productivities and our ability to hire more sales reps. So it's something that we're going to continue to do at a very productive rate.

And as a follow-up though in terms of just where you are in the traction you're seeing with the move-up market, has it done anything to change your near term or intermediate term plans in terms of sales and marketing investments focused on that market? For example, is there any acceleration that we could see in terms of the size of the selling effort there, or is it as the plan you had laid out previously?

I mentioned some of the wins we had on the call earlier. You know, 500 user win, a 700 user deployment. We do see a little bit longer sales cycles there, but the deal sizes are much larger. We also have seen our CAC ratio becoming more efficient over time, and if you look at that compared to the competition, it'll show some of the efficiencies that were seeing.

Okay. A quick question, Clyde in terms of -- I know you talked about if we looked at it first half versus second half, we will see significant improvement in cash flow in the second half, but obviously the fourth quarter is expected to be negative.

But in 3Q, the accrued liabilities, I mean, that was one of the big drivers in the quarter and maybe it's just timing, but in accrues is there anything that was notable there, like commissions or something that had increased a lot to create an outlier there for that line item?

Good question, Terry. We had, if you recall, the building in Denver, we had opened up a new building. I think we mentioned that one or two calls ago. This was more or less the settlement with the landlord. We incur their expense and then he reimbursed us. So that's what you saw back then. These quarter-to-quarter things, it's just timing differences. Obviously, at this scale you'll see more changes overall, but as I mentioned in the first half, we lost cash from operations was negative 11. In the second half putting aside quarter-to-quarter, things should be materially better.

Okay. And just my last question and I'll turn it over to others. I know you're not giving guidance for 2015 Clyde, but it is a common question in terms of the balancing of investing for growth versus showing operating leverage. Has anything changed in terms of your MO as we look into 2015 about kind of steady quarter-to-quarter improvements in terms of that negative operating margin as we look into 2015? Thank you.

Sure, Terry, we'll provide better guidance on our next call for 2015 or guidance for 2015 we're not doing that today. I think if you look at our trajectory of improvements -- of course, this management team is committed to doing that. The one thing I would caution people though is Q1 because of seasonality, particularly related to payroll tax and term reset, you might have an erosion off of Q4, but by and large, putting aside quarter-to-quarter fluctuations, we expect to continue to improve our profitability.

Kash Rangan, Bank of America Merrill Lynch.

Hi, this is Joyce Yang calling in for Kash. Congratulations on a great quarter. I just have a question on the lifetime value per subscriber. Can you compare and contrast the LTV for the subscribers of Charbyte in Central directly versus through the relationship with the telcos like AT&T and BT? And, how do those customer position cost in lifetime differ and what is the total LTV of one versus the other, if you could break that down for us? Thank you.

This is Vlad. Thanks for the compliment.

So customers that we are seeing from our direct channel are similar but tend to be on the slightly smaller size than those we get from the indirect channel, again, indirect being carriers and VARs. There is not that much discrepancy between customer profiles between VARs and carriers that we see. But as a whole, it's slightly more upmarket than we see from our direct business currently.

Now, as far as LTV correspondingly, would be slightly higher for our indirect customers. As far as acquisition costs, we've been I believe fairly consistent about this ever since we went public. We strive to keep our acquisition costs and our CAC to be roughly similar between direct and indirect and that continues to be the case. Overall, we are quite pleased to see our CAC continue to improve and at this point it's something like a little bit over 60%, which does seem to be sort of in the super category at this point.

We continue seeing efficiencies especially as the company matures and as we get more efficient in what we do.

Got it. One more question. So as you scale upmarket now, what type of customer support infrastructures are required and what are the margin implications of that?

Well, customer support is scaling with the needs of our business. We've announced, I forgot, before two quarters ago or three, but we did announce earlier that we are expanding our Denver operations so we are certainly seeing more stringent support requirements for upmarket customers. But the associated costs are well offset by higher LTVs and better retention.

So overall, we think it's a winning game and, again, we really want to draw your attention to the numbers, which don't lie, as we know, so as we are continuing toward the push upmarket, we are also seeing improving CAC, customer acquisition costs, as well as diminishing loss. I believe that you're seeing that we're able to move upmarket while being more efficient at it.

I would also like to add a couple of things to this. Again, as you can see from our numbers, we also are now seeing meaningful gross margin improvements. This has to do with our increasing scale and also we are now seeing benefits of infrastructure buildout and register that some of which we embarked on prior to the IPO and some of it's built into this year, but we're seeing a multipoint improvement in the gross margin, which at the service margin level now puts us smack in the middle of the SaaS category.

Finally, also to note is that with larger customers and other dynamics to understand is that it's really a different customer we are talking to. So with smaller customers, we are talking to the business owner or maybe even the technologist, but not necessarily an IT person. And with larger customers, invariably there is an IT department and frankly, some of them were mundane questions that tend to not ask. So there are efficiencies there, as well.

Got it. Thank you so much.

Heather Bellini, Goldman Sachs.

Great. Just had a couple; a bunch were already answered. I was just wondering if you could share with us more color on how the average number of user per customer is increasing as you move up the enterprise? Appreciate some of the information that you gave out in terms of the category growing 100% year-over-year again. Just wondering if you could provide a little more?

The other question, I know you commented on this a little bit, but just wondering when we think about the ramp of your partnerships with TELUS and BT for next year, how do you -- what type of shape, like what's the slope of the line look like for them being additive? How many quarters out do you think it takes for that to be a material driver for you all? Thank you.

Yes. Hi, Heather. Vlad here again. Central call again. So let's maybe do it in reverse order.

As far as our new carrier wins, which is TELUS and BT, there is no slope to those acquisitions at this point, because neither one has launched as of yet. TELUS is very close to going live. BT is a little bit farther down the line, but we certainly expect both of them to be up and running within the next quarter or two.

Now, as far as contribution, so it's a little early to tell, but our experience with other carriers is showing that it does take a while to ramp. We are dealing with -- as with any SaaS business you tend to start small, but then it's a base that keeps on growing and adding to as that goes, assuming good retention rates, which we have been able to exhibit across all of our channels. So that's the data we have currently at hand. I would not assign too much for, let's say, 2015 to any of these new channels, but we are extremely optimistic that our investments will pay off very, very handsomely in 2016 and beyond across all of our carrier, as well as other indirect initiatives.

So that's the one question you asked. As far as average customer count, or line count, we historically haven't been sharing that, but as you can see from the numbers, this 50 plus segment is by far our fastest growing segment. You know, vastly outpacing the rest of our business with 50 plus growing at over 100% year-over-year. And it's now around 20% of bookings, which is quite a meaningful number in its own right. So we do feel good about it. Average number is increasing and we expect to continue more of the same as we move farther upmarket.

Thank you.

You're welcome.

Bhavin Suri, William Blair. Bhavin Surrey, your line is live. Are you muted on your side?

Hello. Can you hear me now?

Yes now we can hear you.

Thanks for taking my question. I just wanted to touch on the CAC side of the equation there. Maybe this is for Clyde and Vlad a little bit. Have you done any analysis on what the unit economic differential is between the Office product and the non-Office or the legacy product, and then also say on the over 50 or maybe even over 100-type deals versus the typical deals?

Sure. Hi Bhavin, Vlad here. So Office versus non-Office. Look, frankly, our business and our future is Office. So non-Office is kind of on autopilot. Still growing, I'd have to say. Generally speaking, that CAC might even be a little bit better than with Office, but we do have a strategic decision and directive as a company to move upmarket. The basic simple reason for that is the fact that upmarket customers are stickier, so better retention. Overall, better LTV, which might not necessarily be captured in the CAC itself because of retention.

(Multiple speakers) as a near-term ratio. So for those reasons we continue investing in upmarket. It is an interesting point you bring in. We could potentially be growing a little faster by investing more in the down market segments. We just don't think it's the right thing to do for the Company overall given our strategic goals as well as our drive towards overall profitability of the business.

So (inaudible) that unit economics which takes into account retention and lifetime value, the case could be made, and then I guess I could do it at a high level, I just don't know the exact numbers on the spread on the CAC stuff. The case could be made that unit economics are better certainly for the office business than they are for the legacy business, so to speak.

Yes but it's a couple different dynamics, as Matt pointed out. We don't invest a lot of sales and marketing, so we are confusing a number of things here. We don't invest a lot of sales and marketing in the non-Office, it's done really well. You can see the growth, it has grown again. But a lot of that is self-sustaining and the brand has built itself very good over the last few years. So when you look at CAC, it's a different mechanism how we manage that.

So Office is, obviously, a very good product you know about unit economics. Every dollar we invest in sales and marketing we get $8 of lifetime revenue and $5 of profit. We validate that at least every quarter. We just validated that this week even as we go upmarket and we get better, those things are still consistent. But it's a different, slightly different dynamics on the lower end, on the other product.

One other one for me. As you move upmarket you've added a ton of functionality, analytics, obviously, the conferencing, the multilevel IDR et cetera. Is there something that the customers are asking that some of the R&D investments are focused around, especially as you say go from not even 50 but the multi-100, multi-1,000 type environments?

Well, that's an excellent question, if I understand right. So the question is on analytics and as I just shared, this is exactly one of the directions where we're going as far as product improvements are concerned, so we have released an analytics package now which has specifically been asked for by customers and particularly the larger customers. We intend to continue enhancing our analytics capabilities so there will be more customization allowed as we go along.

You know, we are building this functionality into our platform so we absolutely see our ability to expose whatever is going on with the system on a per customer basis. That's a big competitive advantage and we are very much subscribing to include this as part of our overall offering.

Great and one last one from me. Just as you brought up Vlad that competitive environment, any change out there or any of the other players becoming a little more aggressive? Any of these larger players trying to move downstream with a price competitive offering? You seen any change out there?

We do not. No, we don't. It's sort of the same cast of characters. And to me that's (inaudible) the cast of characters is, it's mostly the hardware guys trying to hold onto their systems there, but cloud wins. From the cloud folks, from pure plays, as you know, we're the largest and the fastest growing by far at this point. We just don't see people like Cisco or Avaya, they talk about service offering as opposed to a hardware box but frankly, we just don't see it in the field, not with our customer base.

Great. That's helpful. Thanks. Again, great quarter. Thank you.

Mike Latimore, Northland Capital Markets.

Thanks a lot. Great quarter there. On the deferred revenue that keeps growing pretty rapidly, can you remind me what's behind drive? What's driving the deferred revenues?

It is -- obviously, it's still the timing during the quarter. As we move upmarket, what we are seeing Mike, is more and more customers paying on longer-term contracts. I think about two-thirds of our customers actually sign up for contracts from 1 to 3 years. We are beginning to see a little bit of prepay on that, but that's not going to move the needle yet to where you see it. Directionally, we see that increasing, but it's more timing of when people make their payments. I wouldn't judge too much. It's more in terms of if you look at our revenue growth, it's more in line with that.

And then gross margin, obviously, improved substantially in the quarter. Should we view that as a new baseline from a near-term perspective, or could it pull back a little bit?

Putting aside what I said earlier, and potentially Q1, I think we are very pleased that it hit the service margins passed the 70% threshold, and I think you'll see that in the 70%, a seven-handle zip code going forward.

And then the conferencing application you released. Can you just do a little color on how much interest there is in that, or how much use has occurred among your customer base for the conference application you released earlier in the year?

Yes. We've seen a nice uptick in our premium offering, which encompasses the RingCentral Meetings product and we find that our customers see the value of having both the integrated experience with your phone system and the meeting, we are seeing nice wins against some of the collaboration ventures.

And then last, I know Clyde you probably don't want to touch on 2015 much, but do you think by the end of 2015 you could have EBITDA positive in sight there?

You are right. I don't want to touch on 2015 much, specifically that one. But we'll address that as time goes on.

Thank you.

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

Thank you very much for joining us today. We appreciate your interest in our Company. We're happy to demonstrate continued progress with our office business and are success with larger customers. We're very excited about our position and opportunity in this large and growing market. We appreciate your interest in our Company and look forward to providing you with further updates in the future. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.