RingCentral Inc (RNG) 2019 Q2 法說會逐字稿

Greetings.

Welcome to the RingCentral's Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Ryan Goodman, Head of Investor Relations.

Mr. Goodman, you may begin.

Thank you.

Good afternoon, and welcome to RingCentral's Second Quarter 2019 Earnings Conference Call.

I am Ryan Goodman, RingCentral's Head of Investor Relations.

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

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

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

These statements are subject to risks and uncertainties.

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

A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion.

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

I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral.

For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website.

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

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

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

Good afternoon, and thank you for joining our second quarterly earnings conference call.

We had a strong second quarter, and we extended our leadership in the $50 billion unified communications as a service market.

Revenue, operating margin and non-GAAP EPS all exceeded the high end of our guidance.

Mid-market and enterprise continue to lead the growth with strong contributions from our channel partners.

We are also pleased with the early results of our targeted vertical market initiatives which again contributed multiple 7-figure TCV wins during the quarter.

While not a regular quarterly metric, I am pleased to note that we achieved a key milestone in Q2, namely: We closed a record number of 30 TCV wins of over $1 million which is up over 60% year-over-year.

This included a full enterprise-wide footprint win with a Fortune 1000 multinational software company.

Let me cover some of the key metrics for Q2.

First, total revenues grew to $215 million.

This is a 34% increase year-over-year and is above the high end of our guidance range.

Second, mid-market and enterprise continue to be a key driver of our performance.

We define mid-market and enterprise as $25,000 or more in annual recurring revenue or ARR.

This grew 66% year-over-year and is now a $386 million business.

Enterprise, defined as customers with $100,000 or more in ARR, grew 88% year-over-year to $230 million.

Third, our channel ARR grew 69% year-over-year to $235 million.

Cloud transformation in the unified communications market is gaining momentum, especially within the enterprise segment.

More and more enterprise customers are seeing the value of replacing legacy systems with a unified cloud-based solution.

We don't believe on-premise technology can compete with the cloud in addressing needs of modern mobile and distributed workforces.

RingCentral also continues to hold a leadership position among the cloud providers.

We have invested hundreds of millions of dollars and over a decade in our platform establishing a deep moat versus our competitors.

We believe with our continued commitment to investment in innovation, the gap between ourselves and legacy and other cloud providers will only continue to widen.

RingCentral's key differentiator is our mobile-first integrated voice, video, team messaging and contact center solution with an open platform and a strong global footprint.

We provide our Global Office solution in over 40 countries.

Our unique open platform ecosystem continues to expand to now over 23,000 developers and over 2,500 certified app integrations, both up over 60% year-over-year.

And we are seeing enterprise customers increasingly select RingCentral for our differentiated capabilities that deliver enterprise-grade voice, video, team messaging and contact center on a single open platform.

Of our 7-digit TCV wins last quarter, about 50% cited team messaging as the key influencing factor in the decision to go with RingCentral.

60% of these large deals also included contact center wins.

In addition, I am pleased to announce 2 industry awards, further validating RingCentral's leadership.

First, RingCentral ranked first in IHS Markit 2019 Unified Communications as a Service North American Scorecard for the third consecutive year.

The report highlighted RingCentral's mid-market and enterprise segment growth, global expansion and leading growth in install base.

Second, RingCentral ranked the highest for growth and innovation in the new 2019 Frost & Sullivan UCaaS rater report.

This report highlighted a number of key RingCentral strengths, which included mobility, Global Office and a flexible cloud platform.

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

We are now within striking distance of achieving our goal of exceeding $1 billion in revenue in 2020.

More importantly, we're excited about the long-term journey beyond that.

With a $50 billion market ahead, we're still in the early innings of cloud transformation of the business communication industry.

We aim to extend our leadership position with continued investment in technology, innovation, enterprise sales and relentless focus on the customer.

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

Thank you, Vlad.

Q2 was a great quarter, demonstrating our strength in the mid-market enterprise markets on both product and GTM capabilities.

First, our integrated platform for voice, video, team messaging and contact center, combined with global reach, mobility and open APIs are driving the enterprise market to RingCentral.

A great example of our success with unified platform is the enterprise-wide over 10,000-seat win with a Fortune 1000 multinational software company.

This customer was facing a replacement cycle for its legacy contact center but also decided to push ahead and modernize its legacy PBX system.

Our deep integrations with Google, Salesforce.com and ServiceNow and the ability to have custom workflow integrations were key differentiators.

Additionally, the global reach of our platform and our integrated contact center portfolio were critical.

Another example where global reach helped secure an over 5,000-seat win is with Lumentum, which was won with a channel partner.

Lumentum is a designer and manufacturer of optical and photonic products, enabling optical networking and laser applications.

Their fast-growing global workforce needed a single solution.

They were using multiple modalities of communication with a mix of on-premise and point applications.

We subsumed all these with a unified user experience for voice, video and team messaging.

We're seeing enterprise traction also increasing in traditional industries, particularly in markets where we delivered lighthouse wins in recent quarters.

Following last quarter's win at Waitrose & Partners, this quarter, we secured a 5,000-seat win with C&S Wholesale Grocers.

C&S is the largest wholesale grocery supply company in the U.S. and #10 on the Forbes 100 Private Company list.

C&S needed to modernize its sprawl of legacy on-premise equipment from multiple vendors.

Our ability to deliver a mobile-first unified solution was key to this win.

The customer will leverage our cloud solution across corporate offices, wholesale warehouses and its growing remote workforce.

Second, our strategic GTM initiatives have been key to our success.

We continue to focus on our targeted vertical industry initiative, international expansion, channel and land-and-expand.

In our targeted vertical industry initiative, following last quarter's Fortune 500 insurance company win, we secured a 1,000-plus-seat win with Higginbotham Insurance, a provider of insurance and financial services.

The company found itself with multiple legacy providers across multiple communication modalities.

Our unified platform provided scalability, speed of deployment and ease of use that the customer required.

In international markets, we continue to expand and see strong contributions from the channel.

We're pleased to announce that we recently signed a win for about 2,000 seats with a well-known U.K.-based global lifestyle brand.

We look forward to helping this customer modernize their legacy on-premise systems with our global and mobile-first solution.

Land-and-expand continues to be a key part of our mid-market and enterprise go-to-market strategy.

A great example of this is Public Storage, a win we first secured a year ago for a 2,000-plus location deployment.

We're pleased to announce that the customer is now going to deploy our contact center and workforce optimization solutions.

Let me also give you a brief update on RingCentral Engage Digital, our digital customer engagement platform.

We secured our first U.S.-based Engage digital win in the quarter with one of the largest regional airlines in the U.S. The customer will use Engage for their crew support across multiple digital channels.

This is a new use case for Engage, and we're excited to see customers finding new ways to leverage our digital engagement platform.

We also continue to see success of Engage Digital with telco operators.

In Q2, VodafoneZiggo, a major telco in the Netherlands, selected Engage Digital to support their customers across various digital channels.

Before I turn it over to Mitesh, let me take a moment to share a few leadership appointments.

As we look to the next phase past the first $1 billion in revenue and graduate into a multiproduct company, we look for opportunities to strengthen the team with senior executives with a proven track record in enterprise software.

First, I'm pleased to announce that Will Moxley will be joining RingCentral in a newly created position of Chief Product Officer.

Will joins us after 13 years at Salesforce.com in product management.

His most recent roles included Executive Vice President, Marketing Cloud and Senior Vice President, Sales Cloud.

On the go-to-market side, I'm excited to announce that Carson Hostetter has been promoted to SVP of Field Sales.

Carson will report to me as I continue to oversee all of RingCentral global sales and marketing.

Carson has been with the company for over 3 years as our VP of Enterprise Sales, a role in which he built our enterprise business from scratch to $230 million in ARR.

Carson has also been instrumental in securing our key lighthouse account wins such as Columbia and Waitrose & Partners.

Prior to RingCentral, Carson was VP of Sales at Avaya, where he ran a $1 billion business.

Ryan Azus, who previously served as EVP of Sales, will be transitioning from the company.

Ryan was part of the RingCentral family for over 9 years, and we wish him and his family well.

In summary, Q2 was a great quarter.

Our unified platform and global GTM efforts are driving strong success in mid-market and enterprise.

With this momentum, we look forward to extending our market leadership in 2019 and beyond.

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

Thanks, Dave, and good afternoon, everyone.

We are pleased with our results on all key financial metrics.

Total ARR grew to $831 million, up 32% year-over-year, and ARR for RingCentral Office grew to $749 million, up 37% year-over-year.

Key drivers continue to be mid-market and enterprise with strong contribution from channel partners.

Mid-market and enterprise ARR grew to $386 million, up 66% year-over-year.

We continue focusing on mid-market and enterprise customers as they deliver higher lifetime value with lower churn as well as better land-and-expand potential.

In Q2, mid-market and enterprise yet again contributed around 60% of new bookings.

Driven by this continued shift of market, Office gross churn hit a record low and we yet again saw solid performance in new bookings from our existing customers.

As for the channel, we had a record bookings quarter, driving significant contribution to our growth.

Channel ARR came in at $235 million, up 69% year-over-year.

Upmarket in channel led to strong financial performance in the quarter.

Total revenue grew 34% to $215 million, which included a onetime small benefit from a patent settlement and other revenue.

Subscription revenue grew 33% to $195 million.

Subscription non-GAAP gross margin was 82%, consistent with our guidance.

Non-GAAP operating margin of 9.5% and EPS of $0.21 were both well ahead of our guidance, driven primarily by the revenue upside.

Now let's turn to our outlook.

We are raising our 2019 guidance.

We expect total revenue to be between $874 million and $877 million for an annual growth of 30%.

We are also raising our non-GAAP EPS to $0.77 to $0.79.

In summary, we are pleased with our performance and outlook.

We witnessed solid traction in the enterprise segment with a record number of $1 million-plus TCV deals and are optimistic about future results.

Looking ahead, we are well positioned in the $50 billion UCaaS market as the leading provider of cloud communications solutions.

We uniquely integrate voice, video, team messaging and contact center with an open platform and a global footprint.

We expect to continue taking market share from legacy on-premise vendors and further distance ourselves from cloud competition as we further solidify our market-leading position.

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

(Operator Instructions) Our first question is from Bhavan Suri, William Blair.

Very nice job, both on the top line and on the leverage side here.

I guess my first question is for Vlad.

Vlad, you and David also mentioned you're within sort of the striking distance of $1 billion.

I guess as you think about that and you think about sort of the next 3 to 5 years, what do you think the next set of steps are?

Where do you see the company in 3 to 5 years tops from a bigger-picture perspective?

What's sort of the next target would you like to share with us?

Yes.

Thank you, Bhavan, and thank you for the kind start to this.

Look, it's -- we continue to be playing and leading in this incredibly large $50 billion-plus and very much under-penetrated market.

So as we grow and we are now within striking distance of the $1 billion goal, which is a nice little milestone, but clearly we want to go much beyond that.

So we will continue doubling down on our product and product leadership.

We do foresee expanding our portfolio and deepening as companies do as they get to our scale.

And I just know that we need to do anything, call it, revolutionary to continue on this march.

But we're very much hoping to continue our growth and going into multiple billions of dollars of revenue in sort of in the somewhat foreseeable future.

So I would say more of the same, and if I may say, more up and to the right as we have been.

And then a quick follow-up maybe for Mitesh here.

You had been really consistent, deep by X percent raise, by [better up] this quarter.

Actually it was surprisingly a little stronger than the usual beat you get.

I guess were there any specific drivers for revenue upside?

Just would love some clarity there.

Sure, Bhavan.

So just to double click on the drivers for the beat, all right, that's your question, correct?

Let's go ahead.

So this quarter was -- yes, no, that's fine.

I just want to make sure I captured your -- because your voice came in a little bit muffled.

This quarter, a lot of the chips did fall our way.

But to add color on some specific items, there were about, I would say, 4 or 5 items that did specifically fall our way.

First one is the mid-market and enterprise growth.

We did have a record number of deals, 30 deals over $1 million TCV flowing our way this quarter.

That's number one.

Within that, overall, in the mid-market and enterprise, more deals came in but also the deal sizes got larger.

We are seeing is new green shoots trend where customers are now more comfortable having us deploy to the entire footprint, customer footprint.

That's a new trend we are seeing, so we'll see if it -- how long this lasts.

So -- but it's a new thing that we are witnessing.

The third one is we did see a strong product pull-through from the contact center.

We did have a record contact center quarter.

About 60% of our $1 million TCV deals did have a contact center pull-through.

So that actually also fell our way.

Channel again was a key driver for us.

Sequentially, we did see channel bookings go up 25% quarter-over-quarter, which was very strong.

And in our $1 million deals, about 70% of the deals had a channel component.

And the last one, last but not least, AT&T did perform better than our expectations.

So if you just add it all up, we have multiple growth drivers at any given time, and not every driver needs to work.

But this time, more drivers worked than not, so I think that's what you're seeing as a result of this perfect culmination.

Our next question comes from Brian Peterson, Raymond James.

So a lot of big deals that you announced.

Just curious, maybe 1 for Dave.

Any help on changes in sales cycles?

And is that driving any improvement we've seen this quarter?

Yes.

So we do see varied lengths in sales cycles but we have had a lot of our deals coming in, in the 6- to 9-month time frame.

We've -- I would say it's pretty consistent over time, but we are getting greater recognition in the market.

Vlad talked about the recognition we've gotten from the analysts with IHS Markit and with Frost & Sullivan.

And so that's helping in the recognition our product is superior in the marketplace.

And I think that ultimately leads to shorter sales cycles.

And maybe on a similar thought processes for Mitesh.

Anything on the sales efficiency side that you would point to that's driving the results?

Yes, sure.

I mean, as Dave said, I just double-click on the sales cycle and sales efficiency.

No, we saw a very similar sales efficiency despite us moving up-market where the sales cycles are typically longer.

So we were able to offset some of the impact.

And there were about 2 or 3 things that sort of helped with that.

The first one is we do have a larger percentage of our enterprise reps ramped, so that overall productivity is helping for the entire segment.

Second is we have built our brand and reference-ability.

So we did have a lot of what we call lookalike customers, where we did highlight the grocery chain following Waitrose, but we also had this U.K. luxury lifestyle brand was following GUESS and John Varvatos.

So when that starts to happen, it does help with the sales efficiency.

And the last part, I would say, is our churn.

Gross churn hit a record low.

And that -- so those 3 trends put together are creating this virtuous circle which help us free up more dollars to invest in the future.

Our next question is from Kash Rangan, Bank of America Merrill Lynch.

One for Mitesh and one for Vlad.

First one for Mitesh.

Can you tell us what percentage of the 30 $1 million-plus TCV deals are in your ARR?

Then I have a follow-up for Vlad.

Sure, Kash.

So if you -- the way we record ARR is there are 2 thoughts that come to mind.

One is not -- we only record in our ARR the users that are provisioned.

So if you look at the top deals for the last 3 quarters, let's say, Columbia, Waitrose and this large tech deal we announced, combined, only about, call it, sub-30% shows up in the ARR, which means that there's a lot more future commitment from these contracts that will show up in future ARR.

So that's sort of building block #1.

Building block #2, in the same deals is these large deals also have -- when you land a large deal like that, there's also a lot of large expansion potential.

So this time in the over large deals, over $1 million, we had 70% were new logos, which will then help us with more expansion potential in the future.

So when you combine these 2 vectors, there is a lot of visibility and durability that lends to the growth we'll see because of these 2 phenomenons.

Wonderful, very articulate.

And Vlad, a question for you.

One member of your executive team taught me a long time back that in order to be a really large and successful company in SaaS, you've got to have a multiproduct strategy because that expands your TAM and your sustainability of growth rate.

Can you offer your perspective on how you see RingCentral through that lens, if you agree with that lens, which I'm sure you do?

And congratulations, gentlemen, on a spectacular quarter.

It's fantastic to watch.

Thank you so much, Kash.

Yes.

No, it's actually that is -- look, we have a solution that is defined by any mode -- business communications, any mode, any device anywhere.

So one way to look at the any mode part is we already have in our suite a set of functionalities that in some other cases may exist as stand-alone products but we choose to bundle it all together and to deliver it as an integrated solution but that is also best-in-class.

We think it's a winning strategy.

Obviously, numbers speak for themselves.

We know this is what the customers want.

So frankly, we want to stay with this.

We want to continue deepening our differentiation across all of these modalities, and -- which are voice, messaging and video.

Obviously, we have the contact center product as well.

We have open platform as well.

So as we grow, we see more depth, more depth.

We do think we have a winning recipe, and clearly, leading the market at this point.

We want to widen the moat, and we want to make it an even easier choice for our customers to select Ring over anything else.

Our next question is from Samad Samana, Jefferies.

A couple, if you'll allow me.

Just on the new Chief Product Officer, I'm curious if you think that there's going to be any change in the company's R&D philosophy, whether that's in terms of spending or how you're allocating dollars on new product innovation versus extending out into additional features?

Maybe just what was the driver behind creating that role?

And then I have a follow-up question for Mitesh.

Yes.

So what's the driver?

Look, the driver is to up-level the team.

And look, we have a very, very good team, and this team has got us here and continues to perform.

But as we touch on, and hopefully, soon we'll cross over the $1 billion barrier -- it's not a barrier, a milestone.

I misspoke a little.

But as we scale beyond that, we really do want to have people in the company with that type of experience.

And what better place to look for than the most successful and by far the largest GAAP and revenue company in the space, in the SaaS place, which is Salesforce.com.

And with Will Moxley, in particular, he's led product for both Sales Cloud and Marketing Cloud, which are the definitive success stories in the SaaS place -- in the SaaS space.

So even just myself couldn't be happier with this situation and with the selection and with Will selecting us.

And look, I mean, as far as what changed, again, we just need to continue executing.

We do have the market.

We do have the customer demand.

So we just need to get more efficient.

We need to get more customer-ready and in particular more enterprise-ready.

And again, what better example to learn from than Salesforce.com and their breakaway sales cloud product.

So I would say, overall, look for quality over quantity.

So same quantity, maybe a little better as we grow, but even better quality and even more enterprise readiness and friendliness.

That's very helpful.

And then Mitesh, maybe just 1 follow-up for you.

The first half of the year has been incredibly strong in terms of large deal activity.

But just in total ARR added for Office.

I'm just curious if there's any change in the seasonality.

Is it being spread more evenly across the year?

Or is it -- how should we think about the seasonality of adding net new ARR dollars maybe especially in the context of partners contributing more and more?

Congrats on the quarter.

No.

Sure, Samad.

So yes.

I mean, look, that's a fair observation.

As we're getting more and more enterprise skewed, I think the seasonality is starting to emerge a little bit, where Q2 and Q4 are seasonally stronger and -- than Q1 and Q3.

And that's what we saw.

So I think that's -- and even within that, if you double click, it is getting more and more back-end loaded.

So again, this is -- you can see the glass half-full or half-empty.

We see this glass half-full where, okay, we're getting fair and square enterprise, and so I think this trend is here to stay.

Our next question is from Terry Tillman, SunTrust Robinson Humphrey.

Congrats on the quarter from me as well.

Maybe Mitesh, the first question is this one's the largest dollar beat on revenue ever that we can tell.

And also, some of that did fall nicely through to the bottom line, at least in terms of the margins.

Anything you can think about -- I know beyond just 2019, you gave us updated guidance, but like going forward, longer term, any kind of balance here or shift in balance between investing for growth versus showing margin leverage?

And then I had a follow-up for Dave.

Sure, Terry.

So yes, this is -- we did have a pretty strong quarter on the top and the bottom line.

And if you look at -- if you zoom out to what Vlad said, it is a ginormous market, and we are in the very, very early innings.

So the bias would be to leverage our position and investment growth in both innovation and go-to-market.

But we are maniacally focused on growth, at -- not at all cost but profitable growth.

So we are very, very focused, as you know, on unit economics, which includes cost of acquisitions, churn and upsell.

We did see -- we are seeing customers stay longer.

Our gross churn was, like, a record low, and we are seeing customers buying more.

So with that backdrop, that's the inherent leverage in the model, which you saw, where the beat of $10 million, 30% incrementally flowed to the bottom line.

Now treat that as a proxy for your long-term recurring revenue install base margin.

And so given those kind of unit economics of 30% incremental margin, the bias would be to redeploy that upside and to further fuel our growth and -- but that said, that's dialed in our guidance of 50 to 60 basis points of operating margin expansion on a higher revenue dollar and a higher growth rate.

Okay.

All right.

And Dave, maybe just a follow-up question on enterprise.

Aside from just the go-to-market initiatives and vertical selling, what about on the product side?

Anything you can highlight in terms of just further hardening of the product for enterprise, whether it's embeddable or persist?

Or anything else you can call out that also seems to be a dial that's working in terms of getting more and more of the larger enterprises to adopt?

Yes.

The expansion of the platform that we mentioned, that Vlad mentioned, 60% increase year-over-year and -- is really a key contributor as we've gone into some of these large accounts like Waitrose & Partners and Columbia, and done key integrations into core enterprise applications and workflows for their employees.

And the open platform continually gets cited as one of the core benefits or key distinctive advantages, and I think that's really critical on the enterprise push for us.

Actually -- Vlad here.

I also wanted to just maybe even double-click on this a little, and back to Will Moxley, the CPO announcement.

This is the one area which Salesforce has just frankly pioneered in this space.

And to what Dave said, we're really excited to get those learnings from Will and how to further fortify our open platform and also how to position it as the best-in-class in our segment.

So this is front and center for our road map.

Our next question is from Michael Turrin, Deutsche Bank.

Mitesh, question for you in terms of international expansion.

You announced the big Waitrose win last quarter.

You also now have Westcon helping out overseas.

Can you help us frame the international opportunity and where it is today?

Anything you're able to add in terms of contribution and how that business is tracking is helpful.

Sure.

Sure, Michael.

International.

Yes, international is an emerging growth vector for us.

And this quarter, again, we saw -- it's sub-10% of the business still, but it's growing faster than the overall growth rate so it is pulling up the growth rate.

We did see multi -- multiple million-dollar deals come from the international side, that's one.

Dimelo is turning out to be an interesting growth vector for us.

It's opening doors for us in the omnichannel space where we don't have to replace contact center.

We did announce a win in Netherlands for that, so that's international.

And capitalizing on those trends, we are sort of doubling-down here both in terms of direct sales capacity and channel, where direct sales force, we have doubled the sales force internationally.

It will take some time to reap the productivity benefits but I think we are seeding that, A. B, you saw the Westcon announcement on the channel side.

So I think this international story is yet to play out, and it's going to be, in my mind, a tailwind as we look at it longer term, 2020 and beyond.

That's great.

We'll be watching.

And then maybe on the vertical strategy.

I know it's still early but it seems like is already yielding plenty of low-hanging fruit.

Dave, can we just revisit any lessons learned so far?

How repeatable is that playbook across different industries.

And how would you grade your effectiveness there so far?

Yes.

So I would say our effectiveness is showing but it's still very early.

We've brought in key industry experts that help with the sales cycle itself.

And as we get lookalike wins such as in university, higher education and financial services, where we had a Fortune 500 win last quarter, we had Higginbotham this quarter.

So we're seeing that happen, and we're also looking for product integration opportunities like Canvas that are specific to specific verticals to help distinguish the product and offering.

So having success, and we're seeing it in the numbers, I still think a long ways to go and opportunity there.

Our next question is from George Sutton, Craig-Hallum.

First, I would like to get ahead of the crowd and congratulate you on your upcoming great Q3 results, so congratulations.

I wanted to specifically -- I'll just ask 1 question.

I wanted to focus on the messaging, team messaging side.

You mentioned, and I'm not sure I heard the number correctly, it was either 15% or 50% of your deals were influenced by that offering.

Can you explain why that is the result and whether it was 15% or 50%?

And how are your customers deploying Glip versus Slack and Teams and other options like that?

Yes, yes.

So it was 5-0 or 50% attributed to messaging, and we do see user growth on that, up over triple digits year-over-year.

The key aspect is unifying the experience across our users.

Lumentum's a great example, where they're standardizing across messaging, video and telephony with the RingCentral app.

And Columbia also is another example of that.

And so -- and we do -- you do see examples of replacing existing solutions in that regard as they're looking for usability for the end users and the employees to make them more productive and more effective in the market.

Our next question is from Heather Bellini, Goldman Sachs.

Mitesh, one of the areas I wanted to focus on, you cited strong ARR growth in a number of areas, but the one I wanted to focus on was the strong growth on the partner-led side.

I was wondering if you could talk to us about the ramping of the partner community, how you're seeing new partners signings ramp?

And also, when they're involved, are you seeing higher average deal sizes?

And then I just had a quick follow-up, please.

Yes.

I'll take the partner side of that.

So partner momentum is very strong, as you've seen in the numbers, I think growing over 60% in our channel business.

And that team is a very strong team, continues to grow, and we're getting awareness within the channel.

We just passed 10,000 partners this quarter and continue to add kind of record number of partners every quarter.

So there's good momentum, good awareness.

And for us, it's really continuing penetrating a lot of the current accounts and getting the sellers within those organizations very familiar with the differentiation and distinction of our product offering.

And Heather, it's Mitesh.

Just to add more financial color, we did see that as you asked, deal sizes are getting larger in that vector.

And that's what led to our channel business being up 25% sequentially quarter-over-quarter.

If you look at the top channel partners, they are increasingly contributing to larger deals and higher deals.

So I think yes, we are seeing 2 vectors here: more channel partners being signed up, and then within the channel partners, we are seeing higher penetration.

Okay, great.

And then just 1 quick follow-up.

Any change in duration to note for the TCV commentary you were giving earlier?

Are you seeing customers commit to longer deals, just as they're deciding to make a bigger commitment to the RingCentral platform?

It's at the margin, Heather.

All these TCV deals are multi-year deals.

I didn't see a big pickup one way or the other in terms of duration.

So I think nothing to read there.

Our next question is from Nandan Amladi, Guggenheim Partners.

So first question for Mitesh and a follow-up for Dave.

So you had said historically that 40% of new bookings come from existing customers.

Now as your customer base expands and your product portfolios also expanded, how is this mix trending?

Sure, Nandan.

So yes, we have said about 40% of our new business do come from existing customers, so meaning an upsell.

This quarter, it was very consistent with prior quarters.

We did see a slight uptick in that actually, so it was a positive trend.

And the other trend we are seeing in that same vein is that the biggest driver for upsell so for us is seats, has been seats.

We are seeing again customers adopting different products now being contact center, and this again ties back to this multiproduct strategy we are embarking on, where if you look at this Public Storage example, which Dave said on the call, Public Storage started out with the locations, then it -- we got the headquarters, and then this quarter we got the contact center.

So that's a trend we are -- it's early days but that's another interesting emerging growth vector for us.

So that's part 1.

And part 2, if you look at the precursor to expansion is the landing part.

So we are seeing more new logos getting landed especially on the $1 million TCV.

70% of our $1 million deals were new logos, which should help further expansion in the future.

So we are seeing new customers come to RingCentral and existing customers ramp up their deployments with RingCentral.

And a follow-up for Dave on to go-to-market side.

Again, as your business scales up from $1 billion, say, to $2 billion over the next several years, what should we expect the mix of your direct channel and carrier-driven sales to look like?

Yes.

So I think we've said that direct and channel are kind of split today between that, and we expect that to continue.

As we get into the largest enterprise, we do see a little bit heavier on the channel side.

So we could see it tick up a little bit from where it's at today.

And sorry, what is your comment on the carrier?

Carriers, still early days, but there was some positive performance, as Mitesh mentioned, on AT&T.

So I think that's definitely an opportunity as we expand within our current accounts and look to add additional accounts over time.

Our next question comes from Meta Marshall, Morgan Stanley.

I wanted to circle back to the comment on the regional airline win on Engage.

And you mentioned that it wasn't necessarily the use case that you had thought of.

And I just wanted to kind of dive a little bit deeper into that of who came up with that kind of use case.

Is it something that you can kind of market to multiple customers?

Just some detail there.

And then second, just on the maybe circling back to the AT&T question of just see, is that customer type that came in from AT&T what you expected?

Just any early reads on kind of what you're seeing from AT&T.

Yes, on the regional carrier, the use case was the flight crews that are messaging amongst themselves as well as with corporate, so it tends to be more of an employee communication use case, where Engage Digital is often utilized with consumers of large brands and a customer digital engagement tool.

But the interesting use case there was they wanted to enable their flight crews to message through standard messaging apps such as Apple iBusiness and communicate within the organization that way.

So that may be a trend.

We see it in the consumer space, and it may obviously creep into the employee base over time.

And that's why it's a new, interesting use case.

And the second question on AT&T, types of customers.

It is similar to what we typically see and similar to what we've -- when we've worked with AT&T in the past.

Obviously, the largest accounts have longer sales cycles and were newer with AT&T.

So those are probably coming later than the current mid-market business that we're seeing there.

Our next question is from Jonathan Kees, Summit Insights Group.

I just want to talk about 2 areas.

First, though, congratulations on the quarter.

The first area I want to ask about is I'm sure as testament to your ability to execute, you've already deployed the fix for your webcam in terms of your video meetings.

Did that actually impact any of your turn-ons, any of the activations of your enterprise?

Did you do any damage control with that?

That's the first area.

No.

That was a very quick fix patch that went out and happened within 48 hours type of thing.

And we don't have any customer instances or identified issues with that.

Okay.

Super, super.

And then second, I want to ask.

A competitor of yours has purchased a CPaaS provider.

So just curious what your thoughts are on CPaaS.

Is that a market that your customers are asking for?

Is that something which -- that you consider as part of that integrated portfolio?

Yes, just what your thoughts are on that particular market.

Again, congratulations.

Yes.

Vlad here.

No, no.

Look, great question, sure, surely.

So our thoughts are that as far as -- so that particular transaction, look, we're just going to stick to our guns, and we need to be best-in-class.

So if, and it's a big if, but if we were to consider entering the CPaaS market, we'd probably want to do it in a differentiated way and in a way that would establish us at or near the top of that pyramid.

Now having said that, CPaaS is quite a different market.

It's a very different motion.

Obviously, there is a very well-established leader there.

And other people have tried to sort of take them on head-to-head and I don't think with fantastic results.

So our path is a little bit different.

We do see quite a bit of differentiation between CPaaS and SaaS.

And we are doubling down, tripling down on SaaS.

Again, link back to the Will Moxley announcement and Salesforce, they're not a CPaaS leader in that space.

They're a SaaS leader.

So we like that a lot, and that's what we intend to continue.

And just to be clear, the difference here is recurrent revenue model versus transactional as well as the -- and another way to say that is we enable our paying customers, recurring revenue paying customers, to create custom integrations, create custom apps and support custom workflows based on data and controls provided by Ring, okay, as opposed to just having a flat platform where people can sort of do other use cases.

Our next question is from Richard Valera, Needham & Company.

This is Nate Hitchcock on for Rich Valera.

So you guys have spoken about the channel success year-over-year.

And I'm wondering, have you experienced any changes in the channel compensation dynamics?

And then I do have 1 quick follow-up.

We remain competitive in the channel compensation, and it's pretty standard, and we don't see significant changes in that over time.

Okay.

And you're not able to elaborate much greater there?

That is helpful, but just trying to really understand that as best I can.

No.

I think -- this is Mitesh.

No, I think what Dave said, look, the channel compensation ranges in a certain band, and we play really within the band, and we've not seen that band change much at least for us.

There are other competitors who do increase compensation, but we've not had a reason to increase them.

We are still seeing really good demand from the channel.

Okay.

And then 1 quick follow-up question.

Can you elaborate on any changes that you have seen recently or that you foresee in the competitive landscape?

And specifically any developments in regards to Zoom Phone?

So on the competitive landscape, we continue to get recognized for the robustness of the product.

Any new solutions such as the one you mentioned tend to not be at the higher end of the market or the ability to replace legacy PBX solutions that have traditionally been serviced by like Cisco and Avaya.

So I wouldn't say there's a significant change in the competitive environment.

Our next question is from Will Power, Robert W. Baird & Company.

Okay, great.

Yes, I'll try to sneak in a couple here.

I guess maybe just coming back to enterprise churn, some of the commentary there.

I know that was one of the factors cited in the enterprise strength.

Can you kind of point to what the key drivers of that record-low enterprise churn are?

I mean how much of that's maybe product mix as you move up-market?

Is it quality of service?

Is it product integration?

Just any kind of further color there would be great.

I think it's all of the above, Will.

You're hitting on a lot of key things.

As we've moved into enterprise, we continue to evolve the product capabilities from everything from durability to integrations to billing enhancements.

And those are all contributing to greater satisfaction in the customer base.

And we augment that obviously with key customers' success managers and other kind of go-to-market service level capabilities.

But I think it's the product evolving to a strong product customer fit over time.

Okay, that makes sense.

Okay, I guess the other one I want to come back to is contact center.

I think you also called that as a real driver.

What's behind that?

Are customers actively coming to you more than they were in the past for contact center?

Or are you just putting more of a sales effort behind it?

Maybe just talk about some of the underpinnings of that strength.

We see it as there's kind of a latent demand for the buyers to have a unified solution across contact center and UCaaS.

And on our largest deals, we get close to 60% of those deals utilizing contact center.

So they're typically add-ons to buying UCaaS.

But we do see later in the cycle, like with Public Storage adding contact center later, and those are -- continue to be opportunities especially as we move into larger enterprises who utilize larger contact centers, it becomes a bigger opportunity for us.

(Operator Instructions) Our next question comes from Sterling Auty, JPMorgan.

I'm wondering, you mentioned that the contact center upgrade or replacement was critical in the 1 very large deal that you did.

Looking at the 30 deals with 7-figure TCVs, can you give us a sense of what the driving factor across most of those look like?

So in other words, what was the trend in the large deals in terms of why they chose now to go ahead and make the move?

In a lot of the deals, they're on legacy solutions that are reaching end-of-life.

We have some deals where they're on that platform for 15 years, another where they feel like support for the platform will be going away over time as well as they don't want to manage on-premise equipment and solutions and be responsible for deliverability, uptime.

Those are kind of key that we're just seeing that lifespan of those solutions, and the investments in those platforms have dropped to almost nothing.

So there's no longer a future path to stay on those legacy platforms.

Our next question is from Brian Schwartz, Oppenheimer Funds.

This is Koji Ikeda for Brian Schwartz.

Just one for me, it's on the enterprise segment, the $100,000 ARR segment.

Just grew 88% here, and now it's in that $230 million, which is really incredible.

And on top of that, RingCentral's operating in a really big TAM.

I guess what is the right way to think about the opportunity and penetration in the enterprise segment at this point?

I mean is it really a lot of greenfield still out there?

And are enterprise organizations really just embracing UCaaS at this point?

Or is there some evangelism that still needs to be done by RingCentral during the sales process?

Yes.

Vlad here.

Look, it's both.

Clearly, market is coming to us.

Clearly, we are able to get larger and larger wins and deployments.

And every one of these is a reference case, and it begets us more leads, more opportunities and in them, more wins.

So there's definitely that reality out there.

And if you think about it, many of these are channel-led.

So every time we secure, call it a 7-digit TCV deal -- but that's not the only metric, obviously, but a large deal, it's a feather in our caps, for sure, but it's also a great win for a channel partner, and it gives them additional confidence to bring us into their next deal and next and so forth.

So it is very much a virtuous cycle that way.

So having said all of that, there is still clearly a lot of education to be done, and that's ongoing.

There are still some myths to be busted.

And as you look at us quarter over quarter over quarter, you just see this constant march towards larger and larger wins and with greater and greater frequency.

And the only way to continue that is to continue for us to educating the market, continue not only winning these deals but hanging on to them, expanding within the footprint.

Mitesh addressed that before already.

So again, we think of it as a virtuous circle.

And I wouldn't be probably myself without having -- without mentioning this next point is in the end, it's really all rooted in the product.

We are able to have this momentum and the success rate fundamentally because of our product being right place, right time, addressing actual customer needs.

And for as long as that's going to continue, we are very, very optimistic about the future.

Our next question is from Mike Latimore, Northland Capital Markets.

Again, just 2 clarification questions.

Mitesh, you said maybe 2Qs and 4Qs are seasonally a little stronger, I think is what you said.

Does that refer to bookings or sequential revenue growth or both?

And then on the Fortune 1000 customer, of the 10,000 seats, how many are kind of voice PBXs?

Yes.

So on the first one, I think I was referring more to the bookings trend.

Again, revenue trends, if you look at the entire install base, it may move a smidge but doesn't quite move as much.

But it does impact a little bit, depending upon how back-end loaded the quarter is.

That's one.

And what's your second question?

On the big deal.

How many were UC seats on the big deal?

They were both key contributors in the decision process, UC and CC.

The CC is literally in the hundreds, so the UC is the bulk of that number, of the 10,000.

Our next question is from Catharine Trebnick, Dougherty & Company.

A clarification and a question.

One is when you had given the numbers on your open API and how many developers you have, what was that number again?

And then the question around that really is how are you recruiting, and how do you see this as a key tool in your mid-market?

Is that a pretty big factor in the decision to move towards RingCentral when it comes down to it?

We had over 23,000 developers on the platform was the first part of the question and 2,500 certified app integrations.

The second question was...

How is it driving larger deals?

I think, I'll answer that, Catharine.

Yes, I think it's a key component, right.

As we said, this open platform is a key differentiator.

If you look at the large -- $1 million TCV deals, over 80% of these deals were driven by a component for the open platform.

So I think it's -- when you look at larger customers, these custom workflow integrations are really key for them to feel comfortable to future-proof their UC footprint.

Our next question is from Matt Van Vliet, Stifel.

You mentioned that you have much higher mix of direct sales that are fully ramped, and your efficiency is strong there.

When you look at the U.S. market and maybe some of your other well-developed markets, where do you see headcount growth on the direct sales front trending?

Is it in line with overall bookings expectations?

Or do you start to gain quite a bit of leverage on that?

And where do you feel like overall account coverage is in those developed markets?

Sure.

So I'll take the second part of the question first.

I think the account penetration is there's still a lot of room to go here.

We are somewhat covered in all the NFL cities, but we are actively densifying all our sales footprint.

So I think if you look at the amount of TAM there is of 300 million to 400 million seats at RingCentral, call it at sub-2 million seats, there's a lot of penetration that can happen.

So -- but we are being pretty deliberate in our move forward, where we just don't want to spend the money and not see the return, which leads me to the next question, which is how do we see the headcount growth.

We have typically now, given that the segment is more ramped and mature, we will see productivity gains eke out from the segment itself given the ramp.

So you should expect the overall sales headcount growth below the bookings growth rate, and we'll see some leverage there.

We have reached the end of the question-and-answer session, and this concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.