RingCentral Inc (RNG) 2015 Q3 法說會逐字稿

Greetings and welcome to the RingCentral third-quarter 2015 earnings conference call.

At this time all participants are in a listen only mode. 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, Darren Yip, RingCentral's Director of Investor Relations. Thank you, Mr. Yip, you may begin.

Thank you, good afternoon and welcome to the RingCentral's third-quarter 2015 earnings conference call. I'm Darren Yip RingCentral's Director of Investor Relations.

Joining me today are Vlad Shmunis, Founder, Chairman and CEO and Clyde Hosein, Chief Financial Officer. Our format today will include prepared remarks by Vlad and Clyde followed by Q&A. The primary purpose of today's call is to provide you with information regarding our performance for the third quarter 2015, along with our financial outlook for our fourth quarter and full year 2015.

Some of our discussions and responses to your questions may contain forward-looking statements, including statements regarding our expected financial results for the fourth quarter and full year 2015; our future plans, prospects, and opportunities; trends in the business communications market; our expectations regarding our expansion internationally and up market; our service provider and other resaler relationships; the expected benefits of our integrated partnerships; open platform; the Glip acquisition, and new products and services; our growth strategies; current and future market position; and expected growth.

These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements and projections for a variety of reasons, including, but not limited to, general economic and market conditions; the effects of competition and technological change, the success of our marketing sales and retention efforts; and customer demand for our acceptance of our products and services.

A discussion of the risks and uncertainties related to our business is contained in the filing with the SEC and is incorporated by reference into today's discussion. We disclaim any obligation to update information contained in our forward-looking statements, whether as a result of new information, future events, or otherwise. I encourage you to visit our investor relations website at ir.ringcentral.com to access our third-quarter 2015 earnings press release, our non-GAAP to GAAP reconciliation, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral.

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

Thank you, Darren.

Welcome everyone and thank you for taking the time to join us today. RingCentral had an outstanding third quarter with total revenues organically growing 35% year over year to roughly about a $300 million rate. Additionally our RingCentral office business grew 48% year over year and is now an over $220 million business in its own right. Along with our high-growth, I am very pleased to announce RingCentral's first-ever profit, a quarter earlier than we forecasted.

Our results were driven by continued innovation, under pinning our strong revenue growth and scale in our cost structure resulting in a 12 point improvement in operating margin year over year. RingCentral has exhibited a solid combination of top line growth and margin leverage. I would like to thank our employees, customers, and partners of RingCentral for helping us achieve this major milestone.

This result are a testament to the large market opportunity and our leadership position. Our dedication to innovation through mobile centric software as a service technology enables us to address the very large global Greenfield and replacement business communication markets that total tens of billions of dollars annually.

RingCentral's cloud-based software provides rich functionality is easy to use, easy to deploy and manage, and is designed to address needs of modern distributed and mobile workforce. We continue to extend our market leadership. This was recently recognized by Gartner. Gartner placed RingCentral farther to the right and north in the leaders quadrant in their 2015 Magic quadrant for unified communications as a service. Gartner cited RingCentral's key strengths is user experience, support for accounts, over 1000 employees, API connectivity with leading cloud applications, and mobile-first user deployment.

Our success can be attributed to a number of key drivers that should continue to position us for strong growth in the future. This includes technology leadership, expansion of market, international rates, and strong execution with our service provider and channel partners.

First, with regard to technology, RingCentral has the leading cloud communications platform on the market today. It is very difficult for on premise legacy PBX vendors to address the needs of modern distributed and mobile workforce.

Our mobile centric software is unique in title integrating core communication functionalities like voice, text and fax, as well as audio, video, and web conferencing and now with messaging and team collaboration. Our open platform integrates with best of big business applications, corporate activity, sales, support, analytics, and storage. Businesses today require this level of capability to be more productive and to maintain their competitive edge.

We continued to expand our integration partnerships with the most recent addition of Microsoft Office 365 to our list of out-of-the-box integration which already includes Box, Dropbox, Google for Work, Salesforce, and Zendesk. Additionally, RingCentral Connects open platform allows customers and independent software vendors to create custom workflows and analytics. For example, Sigma software a healthcare practice management software provider, leverages our platform to automatically present critical consolidated patient information immediately when a patient calls.

To extend our technology leadership, I am thrilled to announce the general availability this week ahead of schedule of our third RingCentral office integration with Glip, a company we acquired in Q2. Glip adds powerful team messaging and collaboration capabilities allowing RingCentral to deliver the industries first integrated cloud business communication and team collaboration solutions.

Glip already helped deliver a significant win of 1700 RingCentral office users at the prestigious Columbia University. The university cited Glip's functionality and integrated communication experience as a key factor in their decision. Together these and other innovations continue to extend our technology leadership in the market.

Second, our expansion of market is a significant growth driver. In Q3, ARR, for customers with at least 50 users, grew by over 100% year over year for the sixth consecutive quarter and accounted for about 25% of RingCentral office bookings. This was up from the approximately 20% we have been reporting over the past few quarters. We believe we have now reached an inflection point where enterprises are now comfortable using the cloud for their business communications needs.

For example, we have recently warned 1000 sheets with MINDBODY a new Republic cloud-based business management software and payment platform for the wellness industry. MINDBODY requires a platform to integrate their business communications with Salesforce.com and Office 365 implementations on three different continents. We were uniquely qualified to meet their needs. Another area helping us win larger accounts is our new RingCentral Contact Center product. Offering simplified and transparent pricing and packaging it is off to an excellent start with over 21 in Q3. With our regularly expanding capabilities like our open platform Glip and our powerful global capabilities, RingCentral delivers a unique value proposition for large enterprises.

Third, international reach. The cloud is a superior approach for distributed of innovation, especially internationally. The complexity of managing multiple systems, in multiple countries, with multiple service providers creates a massive administrative overhead for an enterprise.

RingCentral's global cloud platform eliminates this complexity for our customers in a cost-effective manner. With RingCentral, employees can use multiple end form devices such as mobile, desk to phone, and soft phones on PCs and Mac's from anywhere in the world.

Currently, we have RingCentral users in over 140 countries with local calling numbers available in over 70 countries. We have multiple [enterprise customers] who have chosen RingCentral Office to meet their global needs. For example Medallia, a leading software to service provider of customer experience management solutions and with offices in Palo Alto, New York, Buenos Aires, London, Paris, and Hong Kong recently selected RingCentral to power its global operations.

The fourth key growth driver is our unmatched relationships with service providers. With AT&T, BT and Telus we are the only pure play suave business communications company with major carriers reselling our solution.

Overall the service provider channel has the strongest quarter to date with healthy enterprise customer wins across the board. For example, in Canada, working with Telus we won a 250 seat account replacing the customers legacy PBX in order to serve their highly mobile workforce.

Given these drivers, and their track record, momentum and strong commitment to innovation, I am confident that we will continue to execute and will remain at the forefront of the powerful and continuing shift in how are businesses communicate world wide. Moving forward we expect continued leadership through innovation. Increase traction with enterprise customers, ongoing global expansion, and certain momentum from our indirect channels including service providers and [wires].

In summary, we have the vision, teams, technology, and the business model that parallels the best in class suave companies with a combination of growth and leverage. We expect to maintain our leadership position in moving business communications to the cloud worldwide.

And with that I will now turn the call over to Clyde for a review of our financials and guidance.

Thanks, Vlad, for your business update.

Very exciting times for RingCentral. I will now turn to our financial results and forecast for the upcoming quarter.

The highlight of the third quarter from a financial perspective was a combination of a very strong top line growth and continued operating leverage that resulted in us posting an operating profit, as well as breakeven EPS of and non-GAAP basis. As Vlad noted, this is a quarter earlier than we had anticipated.

To the revenue for the third quarter was $76.8 million up 35% year over year and 9% sequentially. This was above our guidance of $74 million to $75 million.

Subscription revenues grew to $70.3 million up 35% year over year and 9% sequentially. On a constant currency basis, our year-over-year growth would have been 1 point higher.

Product revenues grew to $6.5 million and contributed 8% of revenue in the quarter. As a reminder, we do not develop, manufacturer, or otherwise touch the delivery of physical phones, but provide these as a courtesy to our customers of, which more and more are choosing to use our leading cell phones and smart phone app. We rely on providers like Polycom to develop and manufacture these devices and fulfillment partners to successfully serve our customers.

Total annualized exit monthly recurrence subscriptions, or ARR, grew to approximately $300 million, up 35% year over year and 8% sequentially. The ARR for our RingCentral office grew to approximately $228 million, up 48% year over year and 11% sequentially. This growth continues to be driven by a combination of user and ARPU growth year over year as larger customers continue to adopt higher-priced premium and enterprise editions and seek our fully integrated team collaboration on complex center capabilities.

Our focus on customer satisfaction continues to yield excellent results. Our overall net monthly subscription dollar retention rate was over 99% in the quarter. Office net monthly subscription dollar retention was once again over 100%. It is common for customers to adopt RingCentral office in part of their organization and expand over time.

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.

Subscription gross margin improved to a record 76.5% in the quarter, an improvement of 140 basis points from the second quarter and 440 basis points year over year. The result of continued leverage in our multi tenant fast model. This represents our 10th consecutive quarter of improvement and our 2nd consecutive quarter of being within our target range of 75% to 80%, on par with those of other leading SaaS companies.

This includes the benefit of scale in our infrastructure and our ability to drive lower transport costs. As we move upmarket, larger customers are also buying higher priced editions which are accretive to gross margins.

Product gross margin was 18.7% in the quarter, an 11 point increase over Q3 of last year, driven primarily by continued efficiencies in the supply chain. Although product mix may lead to some variability quarter to quarter, we continue to expect a product gross margin of about 10%. Consolidated gross margin, which includes subscriptions and product, was 71.6%, up from 66.5% in Q3 of last year and 70.2% in the previous quarter.

Sales and marketing expenses were $33.1 million for the quarter or 43% of revenues, down a bit from 44% for Q3 of last year and about 47% from the last quarter. Even while increasing penetration of larger customers and maintaining growth with smaller customers, the unit economics in the model remain attractive. Each dollar of sales and marketing invested continues to contribute $8 of revenue and $5 of contribution margin over the projected life of an office customer.

R&D expenses were $11.5 million in the third quarter or 15% of revenues, improving from 19% of revenues in Q3 of 2014 and flat from last quarter. G&A expenses were $9.9 million in Q3 or 13% of revenues, improvement for 14% of revenues in Q3 of 2014 and flat from last quarter.

We had an operating profit of $500,000 which equates to an operating margin about 1%. This is an improvement of 12 points from Q3 of last year and 550 basis points from the second quarter of this year. This was significantly ahead of our guidance of negative 3% to negative 4% for the quarter.

This marks the first quarter in the history of the Company that we have been profitable on the operating line. And we accomplished this goal one quarter earlier than originally expected, all the while keeping our organic growth rate in the mid-30s.

Non-GAAP net income improved to breakeven, compared to a net loss of $7.8 million in Q3 of last year and a net loss of $3.5 million last quarter. Non-GAAP net income per share was also breakeven, better than our Q3 guidance range of a loss of $0.03 to $0.05 per share. Share count was 74 million fully diluted shares, higher than our guidance because we previously assumed we would be reporting a non-GAAP loss in which case basic and diluted share count are the same. With our profitability in Q3, we utilize the treasury method to calculate fully diluted shares.

Our earnings per share had a slight headwind due to currency remeasuring effects on our foreign balance sheet. This amount is embedded in other income line. In Q2, currency remeasurement represented a benefit of roughly $0.01 of EPS. Given that this is non-operational non-cash item, which creates volatility in our earnings from translation effects of the change in currency, we will pro forma this effect positive or negative from our future non-GAAP results.

On a GAAP basis, our Q3 net loss was $6.3 million or $0.09 per share. The difference between our GAAP and non-GAAP results includes $5.8 million or $0.08 per share in stock-based compensation and a net headwind of about $0.01 from the amortization of intangibles of other items related to the Glip acquisition, both of which we excluded from non-GAAP results. We ended Q3 with cash on short-term investments of $132 million compared to $133 million at the end of Q2.

Deferred revenue was $34 million as of September 30, an increase of 11% sequentially and 46% year over year. Deferred revenue grew faster than revenues year over year, due primarily to the impact of larger customers who are more receptive to annual invoices. For the quarter, cash flow from operations was positive $1.8 million, compared to positive $3.9 million for Q3 of last year and positive $1 million for Q2 of this year.

Now turning to our guidance for the fourth quarter and full year 2015. For the fourth quarter, we expect revenue of $80 million to $81 million or growth of about 29% to 31% year over year. We expect non-GAAP operated margin of 0% to positive 1%. This should lead to a non-GAAP earnings per share of zero, plus or minus $0.01, based on 75 million weighted average fully diluted shares outstanding.

For the full year 2015, we expect revenue of $293 million to $294 million, a growth of 33% to 34% year over year, which is an increase from our prior guidance of $288 million to $292 million. Non-GAAP operating margin of approximately negative 2.5%, an improvement of a point from our prior guidance of negative 3% to 4% and an improvement of about 11 points over FY14. This should lead to non-GAAP loss per share of $0.12 to $0.14 based on 70 million weighted average basic shares outstanding, an improvement from our prior guidance of a loss of $0.16 to $0.20.

In summary, our results in the third quarter have demonstrated the successes of the strategies that Vlad outlined earlier. Our revenue growth rate remains among the highest in our industry and is even up sequentially.

Our subscription business continues to see margin expansion. We've now posted our second consecutive quarter of positive operating cash flow and have posted our first quarterly profit in our history. I'm very excited about the direction we're heading and look forward to a strong finish in 2015.

And now I will turn the call over to the operator to take your questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

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

Hey good afternoon gentlemen. Can you hear me okay?

Yes we can Terry.

Hey Vlad, hey Clyde. So first nice to see this actual acceleration in the organic business and top line growth and also the profitability faster than expected, so nice job on that.

Thank you.

Two quick questions. In terms of the Glip integration, you put out a press release at about the same time as the earnings release and it doesn't seem to talk about a separate monetization strategy or something that could cause an uplift when somebody's buying Office with Glip being utilize. And I guess am I reading that the right way and is it more of just a competitive dynamic where you can differentiate in sales cycles but you don't see it as separate monetization strategy?

Okay. Yes. Vlad here, Terry. So first thank you for the kind words, I'm very happy with our recent results.

On Glip, look clearly we're planning to monetize it and other recent press release we've announced Columbia University and specifically cited that Glip integration and bring in communications and collaboration together was one of the key factors in their decision. So that's the major thousand plus seat win, with more opportunity to expand which to be blunt we probably would not have had without Glip. So we see more of that to come.

As far as, I think we were also clear in the press release that Glip will continue to be available on standalone basis as well as part of RingCentral office. So inasmuch as is being utilized as a standalone product, we do have monetization strategies attached to that. So we absolutely expect to leverage it both ways.

Okay and I guess on Columbia University, it seems like a good win. I mean that's well above if my math is correct which I guess sometimes it isn't that's well above 50 users if I'm not mistaken. So that's -- and that kind of -- what is that?

Seems to us the same way, yes it is more than 50 users.

Yes, yes, I'll round it up.

In the kind of situation, are you actually, are you competing against the incumbent? I'm assuming it's a Legacy PBX provider and that's the main competitor and it's more about inertia why should you change, we can provide something that is more cloud enabled going forward.

Or is it actually, they're actually steadfast on moving away from the Legacy PBX guys and then it becomes a cloud question and you're competing against maybe service providers that have another cloud option other than you or a broad soft enabled solution or an 8 by 8. I guess in that specific deal who would you have competed against is it an incumbent trying to maintain a foothold or is it more cloud providers and was this a direct dealer reseller driven deal? Thank you.

Sure. So Terry, the biggest competitor here was an incumbent on premise provider that fought really hard for it. But for other reasons Vlad gave earlier, and all the reasons you gave which is people see the cloud happening, I think we won out on that one. But it was, the big fight was on premise existing provider.

As is the case in the vast majority of the situation in special op markets. And we've been very clear I think, literally from the day we IPO'd the big fight is in replacing and the legacy ecosystem into the cloud where we are very, very comfortable that, that will take place. It is taking place as we speak.

And we believe that we are in a solid leaders position there as far as leading this migration to the cloud. And certainly investing across a number of initiatives starting with innovation to maintain and cement our leadership position.

Our next question comes from the line of Brad Zelnick from Jefferies.

Great. Guys this quarter I mean from all aspects that we look at the story you've really done a phenomenal job so congratulations to you. Two questions.

For starters, on pricing. As we listen to what's happening out there in the market there are some very aggressively priced deals and actions and some of your competitors are coming in. And if I listen to the remarks, I think Clyde you had said that Office ARPU has actually gone up but it sounds like that's a function of mix which is great. But if you look at the business on a like for like basis what are the latest trends in terms of average discount.

Average discount is hard to say, Brad. As we mentioned, ARPU is increasing and as we said in the prepared remarks part of it is that.

Very rarely do we see within deals on price. It happens from time to time, but if you look at the number of deals they are in the vast majority and part of that is the value proposition in it self customers save anywhere from 30% to 60% over the existing solution. So they are already saving a fair amount.

The biggest challenge for us is proving to them the cloud functionality can be delivered with every bit as reliability and performance as it used to today. It's less of a price issue. I think the price competitiveness is more anecdotal than it is in reality. Not that we never see it, it's a small amount to the case.

That's helpful and just on margins. It's great to see you get to profitability a quarter sooner than you originally expected. The progression on gross margin continues to exceed expectations you are already in your long-term target range on service margin, gross margin.

But if we peel that back and then look to where we are on opt margins you certainly have a lot of headroom at least from here to ultimately getting to I think with the 20% to 25% long-term target. And if I look even to the guidance for Q4, you've actually guided us at the midpoint 50 basis points even a little bit down from what you achieved in Q3 which we appreciated is a function of over achieving on the top line this quarter.

But I'm not nitpick from quarter to quarter and basis points, but can you just remind us philosophically, Clyde, as we look out a year from now, two years from now, and you think about the investments that you're making for the future, is there maybe a way to talk about the opportunity and the investment philosophy that you have and how we should think about margins kind of medium to longer term?

Fair question Brad, look we had profitability earlier putting aside any seasonality that you might hit say for example in Q1 for example I'm not forecasting obviously the only forecast we're providing for right now is to Q4. Putting aside any seasonality this is not a flash in the pan. We don't intend to show you one quarter we profitable and move on.

So I think that is the strength of the business model and you highlight some of the key aspects including service gross margin. I think on a going forward basis and inherent with the SaaS model it is a very large underpenetrated market. We've got an excellent product. The market opportunity ahead of us is huge and so you have got to invest sales and marketing in the mid-40s type range.

With that in mind, so we'll continue do that which will drive top line growth. That's a continued strategy to win a number of customers. Remind everyone that the unit economics for every customer we acquire every $1 is $8 of revenue and $5 of lifetime profit, you do that math that translates into 20%, 30% operating margin in year 3 and thereafter. That's what you see in the model.

So it makes sense for us -- it continues to make sense for us to keep investing in adding new customers and we will do that. The consequence of that is as you do that your near term profitability will be affected.

Having said all of that I do think you will see improvements in our operating margins from quarter-to-quarter I think as you said given the noise. But our focus from here will be while we improving that on a moderate basis will be driving that top line to continue to drive that top line to very industrial leading.

Our next question comes from the line of Nikolay Beliov from Bank of America.

Hi, thanks for taking my question and congratulations on the nice execution.

Clyde, when you look at the revenue growth from drivers that you've added since the IPO maybe can help us take random in terms of business impact in terms of incremental description revenues, number one I guess domestic upmarket, number two international direct business then international telco, the connect platform, call center, (inaudible), and Office 365, and then Google Relationships extended driving business. What were the main drivers of the business right now?

The good news is all of those things are driving the business. We've got multiple vectors of growth in the engine and from quarter to quarter some of these might be, take precedence over another one.

Having said that, I think upmarket, since the IPO has been very robust for us. One metric we put out there is how mid market which is 50 plus, 50 to 1000 if you may, has been growing over 100% over the last 6 quarters. So that's demonstrated and now represents about 25%-ish of our bookings, so that is certainly well.

The next one I put on that list, keeping in mind Nikolay that this changes quarter-to-quarter, but on a sustained basis I would say indirect which includes our Vas as well as our service provider partners. We've got three of them on the platform now. I would say they are contributing probably next.

And third international. I think international has got a lot of opportunities ahead of us, in a number of flavors both say US and UK companies look to have a single platform globally as well as new customers in other geographies. Both of those are potential growth areas for us.

In summary I would say upmarket, indirect including Vas and service providers followed by international has been, I think those we will continue but the mix might change from year-to-year.

Got it and one other question for you. When you look at the complex landscape now versus the time of the IPO when you look at the legacy vendors, the cloud vendor including what Vonage has been doing and now your Microsoft Skype business what have been the changes and what they are, and what opportunities and concerns are you seeing?

Sure. So we actually don't see that much change as far as vendors with their own technology platforms. That continues to be a fairly small and consistent set.

Some of the names you mentioned, Vonage they have entered this business through acquisition we continue not seeing them as a core technology provider. We think that us having a platform and investing rather heavily into R&D is and will continue to be a source of continued competitive advantage. So that on that one.

As far as Skype for business is concerned, we will hear about it from time to time, but we have already highlighted our emerging relationship with Microsoft Office 365 in particular. So I will also referred to the last Gartner report which made it very clear that they consider us to be in the lead on both the visionary scale as well as ability to execute into the quarter.

So the fact of the matter is, if you as a business want to run your business communications through the cloud Microsoft to day does not have a solution. They're talking about it but to day it is not a reality ours is and we feel pretty good about our ability to continue competing effectively and moving forward.

Our next question comes from the line of Mike Latimore from Northland Capital markets.

Thanks very much, excellent quarter. On the Columbia, I know you are you replacing a legacy phone system. Are you replacing anything else there like a web conferencing service or instant messaging service or any other major technology categories you are replacing on that?

Mike RingCentral has the capability of doing all that, as you know. But I'm not aware if they did replace that, but they had the capability to use it. The key was collaboration with Glip and the strength of RingCentral and the strength of the platform.

In terms of your --

Also integration Mike with Google for work. So there's a number of things in there, I don't know if other replacements happened but it certainly has that capability.

Yes. In terms of your new subs added in a quarter in this last quarter, how many come from current customers it looks like, the expansion how much of that is driving your top line?

Most of it is new customers. There has been some but I think the vast majority is new additions to it, the upselling while there has been some I think that's an opportunity ahead for us. But to-date, in Q3 has been new adds.

Okay. Thanks. Great quarter.

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

Hi thanks for taking my question this afternoon. I too will pass along congratulations on a great quarter.

A couple of questions I wanted to ask -- I wanted to ask a question on the Columbia deal, but a little bit different person about it. Columbia is a very prestigious brand, their university it is great to hear that. I don't remember hearing you guys talk a lot or even talk in the past about the higher ed tech vertical, or even the education vertical in general.

Can you talk a little bit about what you're seeing in terms of new vertical opportunities and if there is any strategies going forward to capitalize on it maybe through your Glip acquisition? Or is this just maybe it's just a one-off deal in the education vertical that came to you guys through the acquisition relationship. And then I have a follow up question.

Sure. Certainly we don't think we hope is not going to be a one-off. [Slad] is one of the identified verticals that we have. We do have a concerted effort.

Needless to say with the prestigious institution like Columbia, being a referenceable customer we expect that we will be received yet better in other educational institutions, whether it be higher ed educational or obviously there's a wider base with colleges that are not Columbia. So we feel very good about it. We just think it's a fantastic reference case and it really highlights, plays to our strength of combining communications with collaboration which is important to the industry.

Thank you. Vlad one other follow-up question I just wanted to ask you on the macro and really the end market that, it sounded to me in your introductory comments that you sounded pretty excited you maybe even use the word inflection in terms of what you're seeing in the opportunities in the upmarket. It makes me think that what we are seeing in terms of the SaaS transformation out there it's under proved into business communication.

So what I wanted to ask you Vlad is in the upmarket deal discussions are you still evangelizing the cloud for business communication? Or is starting to become apparent that these upmarket businesses they've had success with SaaS and maybe their other business processes like CRM and indus RingCentral is starting to see increased interest levels in the upmarket with noticeably less cloud evangelizing in the sales process.

Is actually yes to all of the above. Yes we see an inflection point. Yes it is becoming much easier to convince people that cloud for business IT in general and now for business communication in particular is a viable and a superior way to go.

But having said that with that we are absolutely evangelizing because the vast majority of our new customers are used to Legacy systems. So we do need to educate them on the particular benefits. But it's now becoming much easier to due so because many of them have already embraced the cloud in their other disciplines be it CRM, or HRS, or marketing communication, or what have you.

So we are making sure that they understand the benefits of savings and efficiencies they can achieve with communications through the cloud are at least as great as what they are seeing with other SA business IT.

Mark Sue, RBC Capital Markets.

Thank you. Gentlemen when I look at your financial metrics the turn is quite low and the lifetime value math is still scaling.

So the question is why not spend more in such a large term, particularly when you are gaining market share? When you look at the long-term model are there any thoughts to actually push the accelerator spending for more customer acquisitions since in technology oftentimes the winner can it's expense to the amount of the market so would you consider spending more to get more?

So Mark thank you very much a little bit of a contrast to the question Brad asked earlier.

But that's the balance we've got to make, right, we've got to balance growth as well as profitability. Certainly the results to-date we've improved operating margin over 20 points over the last two years since the IPO demonstrating success of the model.

So yes, if this was a private company completely with unlimited balance sheet we would do exactly what you are describing. The reality is we have a defined balance sheet, we know what, or at least we think we do, understand what investors are looking for from us and we've got to make that balance. The balance so far has translated to mid-30s growth and 20 points of improvement margin. I described earlier that we might moderate that but that is the future business model for us to contemplate as we go forward.

That's helpful. When you look at larger customers, do you feel that they need some additional customization, more implementation requirements, or at the point where your scaling quite well with larger customers as well?

Absolutely they do have requirements that are different from SMBs. And some of that is -- we've been highlighting so for example, many if not most of those do require integrations with other aspects of their IT. They are interested in custom reports, custom workflow's, custom controls. We are continuing to expand and evolve our RingCentral connect platform.

We believe it is unique in the industry we have an open platform for the communication system. So we have probably most of our of market customers are taking advantage of that now.

As far as Prof services are concerned, yes also we're seeing more and more of that. We are offering it to our enterprise accounts and, frankly, they expect it, just like they get Prof services from Salesforce. So similar demand is here. So we are definitely giving up or help them adapt and continue to do so in addressing all of their needs as you would expect from a top-tier vendor.

Our next question comes from the line of James Faucette from Morgan Stanley

Thank you very much. I had a couple of questions largely maybe follow ups to the previous ones.

First can you talk a little bit about the size and types of call centers where you're expecting where you are starting to see initial traction and response to that product? Are these outgoing call centers, or customer care centers? Just a little more color on the types of market that you are finding success there.

And then back on the customer acquisition effort and sales and marketing efforts, how should we think about the objectives from a long-term perspective of being able to scale that? And what kind of -- do you hasn't targets in mind in terms of return on investment there or dollar metrics similar to what you have outlined? I guess maybe one idea here is any chance that you can take the MINDBODY customer and make that part of their solution set it seems like their customer set and your customers set should overlap pretty well? Thanks.

Sure. Okay.

So on the call centers -- look the solutions that we're looking for is based on an industry leading cloud platform that has been known to scale into thousands of seats and if supported both inbound and outbound calls centers. So we certainly don't feel that there is any technology barriers that we have at this point in meeting those needs.

Having said that, we're not targeting outbound call centers in particular. We are really offering this integrated solution as a one-stop shop to customers with in-house call centers.

Again this is not to say that we do not, or will not have peer call center customers, but vast majority are people who are running a cloud phone system -- a central cloud phone system for their phone solution, as well as they would have and in-house contact center. And that can be dozens of seats or hundreds of seats.

James on the RI question, look it's a very large market and we're doing very well with it. Obviously many questions have been asked today about accelerate investments are accelerate profitability and that's the challenge we have.

Here is the metric we do measure LTV to CAC and a number of other things intrinsically. But the metric we provide, I think is the best metric for our ICU where every $1 of sales and marketing we invest gets us $8 of lifetime revenue and $5 of lifetime profit and when you translate it, it translates to 20% 30% of more operating profit than year 3 or thereafter.

So that's the metric we have consistently managed by since the IPO and the opportunity is still there. And we still managing to that. So that's the best metric that I think we can provide to you from a near-term history and even a going forward basis.

Our next question comes from the line of Heather Bellini from Goldman Sachs.

Hi, great thank you. There is not much left to ask.

I guess I just had a question related to you mentioned that, that now 25% of office bookings -- RingCentral office bookings are from customers with seats of a least 50 users or greater up from 20% which you guys I think have been talking about for the last few quarters. You then also mentioned that you think you've reached an inflection point. Can you share with us how we should think about that 25% ramping over the course of the next 12 months?

Heather, I think it's going to be tough for us to describe that, maybe on the next year end call we can provide guidance 2016.

Keep in mind, even in the last year we've grown revenues 35%. So even while you're growing the business 35%, you are increasing the concentration from 20%-ish or 25%-ish. So needless to say, it's possible that would increase, but I would refrain from providing any specifics till we get to 2016.

Yes, no I'm just mentioning because you guys called out that you've reached an inflection. So maybe then you could just share with us what do you think the inflection is that's going cause that number to accelerate, unless I'm misreading your comments.

Sure, Heather, Vlad here. So what we mean with this is that the percentage of customers of new customers that we are getting was always 50 seats has been increasing. If you remember, we've been talking more in the 20% range up until now so this is the first time we're saying this is around 25%.

But frankly, more importantly is the fact that we have continued investments and continued acceptance from larger and larger customers. And if you look at just the strength of recent announcements we've had between Columbia and MINDBODY just to name a few, we are qualitatively seeing better acceptance and better adoption across larger accounts.

Having said that, it's a journey, it's not an event, you know. What we do know is that we have closed and actually exceeded the gap between us and traditional Legacy systems, which remains to be a number one condition. We have solution which is easier to use, as fully functional is better, much more open, easier to use, easier to integrate. Frankly, (inaudible) so we think that will continue integration away from legacy and into the cloud.

We have time for one last question. Sterling Auty from JPMorgan.

Yes thanks guys. I apologize for bouncing between multiple calls.

But I wanted to get a sense, as your, as your average new customer the number of new customers that are above 50 seats, what is that actually doing to the churn or kind of the consistency of the renewal rate in the business? Is that starting to actually have an uplift or a positive impact?

Yes we been consistently showing that our office churn is, let me put it another way our office retention is continuously better is outpacing our overextension just because larger customers are less likely to go out of business. And also with larger companies there is more of an extend opportunity -- and I can tell you that the larger the account, the less likely to churn and more likely on a net churn basis the more likely we are to upsells seats.

Again our number one by far driver for churn is the customer business itself terminating. Larger companies, certainly companies with over 50 employees, just don't give into that. So we expect those trends to continue and for both overall churn and office churn as well as office 50 plus churn to decrease and (inaudible).

Got it. Thank you.

That is all the time we have for questions today I'd like to hand the call, back over to Clyde for closing comments.

Thanks Doug, thank you all for joining us for today's call. As a reminder RingCentral will be at the Needham, Jefferies, Credit Suisse, and Raymond James events in the coming weeks. We look forward to further discussions with you then. Have a nice evening.

Ladies and gentlemen this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.