RingCentral Inc (RNG) 2019 Q3 法說會逐字稿

Greetings, and welcome to the RingCentral Third Quarter 2019 Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Ryan Goodman, Investor Relations for RingCentral.

Ryan, please go ahead.

Thank you.

Good afternoon, and welcome to RingCentral's Third 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 GAAP to non-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 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 third quarter earnings conference call.

We delivered an outstanding quarter on multiple fronts.

First, we're pleased to announce today that we have expanded our relationship with AT&T.

Second, we announced the Avaya partnership in early October.

And last week, we announced that necessary regulatory approvals were obtained on a timely basis as the deal has closed.

On industry recognition, for the first year -- for the fifth year in a row, Gartner positioned RingCentral as the leader in the Magic Quadrant for Unified Communications as a Service, Worldwide report.

On the business front, we had a record level of $1 million-plus TCV wins.

This is especially good to see in Q3, which is typically slower, and speaks well to enterprise readiness to embrace the cloud and our leadership position there.

All of these not only speak to RingCentral's consistent execution and innovation but also validates the industry shift and momentum going to the cloud.

I'll now review Q3 results.

Revenue and non-GAAP EPS exceeded the high end of our guidance.

Key drivers continue to be mid-market, enterprise and channel.

As we expand our markets, we are also seeing positive results with our targeted vertical market initiatives focused on financial services, health care and education as well as continued strength in contact center.

Key metrics for Q3 were solid across the board.

Total revenues grew to $233 million.

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

Mid-market and enterprise continues 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 61% year-over-year and is now a $426 million business.

Enterprise, defined as customers with $100,000 or more in ARR, grew 77% year-over-year to $259 million.

Channel ARR grew 63% year-over-year to $263 million.

We are seeing traction pick up across a breadth of vertical markets.

In Q3, we saw over 30% of our $1 million TCV wins come from our targeted vertical industry.

As enterprise customers go through digital transformation, we believe we are well positioned with our leading cloud communication solutions.

RingCentral continues to hold a leadership position among the cloud drivers.

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, that gap between ourselves, legacy and other cloud providers will only continue to widen.

We're pleased with the success we're seeing with our platform, and we constantly look for ways to bring our leading solutions to broader markets.

On that note, as I mentioned earlier, we recently had 2 key announcements that significantly expand our GTM opportunities.

Earlier this afternoon, we announced that we are expanding our relationship with AT&T.

Under this agreement, AT&T Office@Hand powered by RingCentral will be a lead UCaaS solution for AT&T.

In addition, AT&T and RingCentral will jointly develop global capabilities and technologies that will further integrate with AT&T's network for better overall customer experience.

Last month, we announced a strategic agreement between RingCentral and Avaya in which RingCentral and Avaya will introduce a new solution, Avaya Cloud Office by RingCentral, which will be the exclusive UCaaS solution marketed and sold by Avaya.

This partnership leverages respective strengths of each company, aligning Avaya's strong market presence and worldwide go-to-market capabilities with RingCentral's leading global UCaaS platform.

We continue to believe this partnership represents a major opportunity for customers, partners, and of course, RingCentral and Avaya.

Customers should benefit from enhanced functionality, improved visibility and overall TCO sales.

And partners should benefit as they will now be able to better satisfy the evolving needs of their customers while building a predictable recurrent revenue portfolio with attractive economics.

We have spoken with a number of channel partners following this announcement, and feedback has been overwhelmingly positive.

As I noted, this transaction closed last week.

We will now begin to work to deliver the Avaya Cloud Office solution, which we expect to ship in Q1 next year.

As a testament to our innovation leadership, we are proud to once again be recognized as a leader in the Gartner Magic Quadrant for Unified Communications as a Service, Worldwide report.

For the fifth year in a row, RingCentral was positioned furthest for completeness of vision in the Leaders quadrant.

Our execution on numerous fronts, as further evidenced by another record quarter for double-digit TCV wins, further validates our leadership position in the UCaaS market, and we are excited with the opportunities in front of us.

With $50 billion market that is ripe for disruption, we're still in the very early innings of cloud transformation.

It has never been more clear that the cloud is winning, and RingCentral is winning in the cloud.

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

Thank you, Vlad.

Q3 was a strong quarter again, driven by strength in mid-market and enterprise markets.

We continue to win based on our superior product and GTM capabilities.

First, our unified platform, which integrates voice, video and team messaging with an open platform and strong global footprint is resonating with large enterprise customers.

In Q3, over 70% of our $1 million TCV wins cited our open platform as a key differentiator.

Our open platform ecosystem now has nearly 3,000 certified integrations and over 25,000 developers.

Additionally, over 50% of these wins cited integrated team messaging as another influencing factor.

A great example of our global platform driving customer success is our nearly 6,000-seat win with Crawford & Company, the world's largest publicly listed independent provider of claims management and outsourcing solutions.

Achieving their mission to restore and enhance lives, businesses and communities depend on their ability to quickly manage claim intake in their call centers around the world, which can now be managed with RingCentral Global Office solution.

This is also a good example of land and expand as they've added RingCentral UCaaS to the initial contact center deployment.

Another great win where a customer is leveraging our unified solution is Hot Topic, a fashion, apparel and accessories retail chain.

This customer is looking to replace legacy on-premise communication systems across its corporate offices, distribution centers and over 400 retail stores.

They wanted an easy-to-manage, mobile-first communications platform that provided integrated voice, team messaging and video capabilities.

With deployment underway, Hot Topic users stated that they are already seeing an enhanced level of team collaboration using RingCentral team messaging and meetings.

Another large customer transitioning to RingCentral is Staples in Canada.

Staples wanted to consolidate its sprawl of multi-vendors across more than 300 locations to a scalable cloud-based single platform.

RingCentral's ease of deployment, administration and analytics were also important differentiators in this over 4,500-seat win.

Building on our product platform strengths, we are seeing success with our targeted GTM vertical initiatives, driving $1 million-plus TCV wins.

Customers are showing strong interest in many of our vertically focused app integrations, including Smarsh and Jack Henry in financial services and Canvas in education.

As Vlad mentioned, we saw over 30% of our $1 million TCV wins come from our targeted vertical industries.

In health care, we've built a great relationship with Pacific Dental Services, one of the country's leading dental support organizations.

Pacific Dental first signed on with RingCentral over 2 years ago and has since ramped to approximately 6,000 UCaaS seats with strong adoption across messaging, calling and meetings.

In Q3, the customer adopted RingCentral Contact center, aligning on a single platform for UCaaS and contact center.

In financial services, I already highlighted our win with Crawford.

We're also finding strong traction with credit unions.

For example, Credit Union One, an Illinois-based credit union with over 20 locations, will deploy RingCentral for both UCaaS and contact center.

We're also continuing to see success in higher education, including a win at Queens University of Charlotte.

This was an on-premise system replacement to help the university meet its increasingly diverse needs.

Let me now provide a brief update on the success we are seeing with our customer engagement portfolio.

This consists of RingCentral Contact Center used for inbound voice and based on NICE inContact, Engage Digital used for digital channels based on our Dimelo acquisition last year and Engage Voice used for outbound blended voice and based on our Connect First acquisition earlier this year.

A recent example of a RingCentral Contact Center win was with a large manufacturer of biomedical testing equipment.

This customer has been rolling out RingCentral Office across its global workforce.

In Q3, the customer signed for over 500 RingCentral Contact Center seats for its sales and customer support.

A key Q3 win with Engage Digital was with Renault Group, a major global car manufacturer.

Renault will use RingCentral Engage Digital to streamline social channels interaction in the U.K., Spain and in France.

We're also pleased to announce a large Q3 win for outbound customer engagement with Engage Voice.

We secured an over 500-seat win with Immediate Credit Recovery, a large collections agency.

Engage Voice's superior reliability compared to their existing solution was a key factor in Immediate Credit Recovery's decision to switch from the prior provider.

These and other wins are a testament to RingCentral's customer engagement portfolio becoming increasingly important as we move upmarket.

RingCentral customers are now able to leverage a single platform for all its internal and external communication needs.

This drives productivity improvements and increases customer satisfaction.

In summary, Q3 was a great quarter.

We look forward to driving this positive momentum through the remainder of the year and into 2020.

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 $881 million, up 31% year-over-year.

And ARR for RingCentral Office grew to $800 million, up 35% 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 $426 million, up 61% year-over-year.

This momentum is driven by underlying strength in new logos where we achieved a record number of 7-digit TCV deals as well as upsell, which improved sequentially.

These trends resulted in mid-market and enterprise customers accounting for the highest bookings mix to date.

Higher upmarket mix is a positive indicator of our profitable growth given better lifetime value from lower churn and greater land-and-expand potential.

As for channel, it delivered another solid quarter.

Channel ARR came in at $263 million, up 63% year-over-year and also accounted for over 70% of our $1 million TCV wins.

We continue to broaden our network with expanded relationships with Converge One, SYNNEX, Fujitsu and Westcon, which we expect to help fuel future growth.

And upon delivery of Avaya Cloud Office by RingCentral, we will have access to Avaya's leading global channel partner network.

Overall, upmarket and channel led to strong financial performance in the quarter, both on the top and bottom line.

Total revenue grew 34% to $233 million, and subscription revenue grew 33% to $211 million.

Subscription non-GAAP gross margin was 82%, and non-GAAP operating margin was 9.3%.

Non-GAAP EPS of $0.22 was above the high end of our guidance range, driven primarily by the revenue upside.

On to the full year 2019 outlook.

We are raising total revenue to be between $888 million and $890 million for an annual growth of 32%.

We are also raising our non-GAAP EPS to $0.81.

Now I would like to discuss our 2 new strategic partnerships that we expect to be strong additional drivers for our long-term performance, starting with the latest news first, which is our expanded relationship with AT&T.

Building on our recent successes together, AT&T is now making RingCentral a lead UCaaS solution.

We are very pleased with this decision and look forward to continued successes together.

Dave Sipes, our COO; and Roman Pacewicz, Chief Product Officer of AT&T Business, will be speaking tomorrow in Dallas at AT&T's Annual Business Summit about this expanded relationship.

We are confident that the expanded agreement will provide an incremental vector to our go-to-market motion.

As to Avaya, this transaction closed last week.

It is a significant new opportunity, which combines the strength of Avaya's global go-to-market capabilities with RingCentral's leading UCaaS technology platform.

We are diligently working toward a product launch in Q1 next year.

We are excited about the Avaya and AT&T partnerships and believe both will provide additional durability to our long-term growth.

RingCentral is at the forefront of enabling enterprise digital transformation in the communications industry.

Our long-term unwavering commitment to investment in innovation is clearly paying off.

Long-standing industry leaders with vast go-to-market capabilities are now selecting RingCentral as a leading UCaaS solution for their customers.

With these tailwinds, we are more confident than ever in our ability to execute on the long-term vision of converting on-premise business communications to the cloud.

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

(Operator Instructions) Our first question today is coming from Terry Tillman from SunTrust Robinson Humphrey.

Can you hear me?

Yes, yes, we can.

Yes.

Okay.

Well, first, the standard, nice job on the quarter.

I want to get that out of the way.

But I guess the first question is going to be either for Vlad or Dave in terms of really framing the growth opportunity around Avaya and now incrementally with AT&T.

We get a lot of questions from investors just trying to understand timing of impact.

And I guess for Vlad or Dave, first question is just related to how impactful or material could these developments be as we move into 2020.

And then I had a follow-up for Mitesh.

Well, on both Avaya and AT&T, we see these as opportunities to move large on-prem installed base into the cloud.

Avaya is -- we're launching product in Q1.

And with AT&T, we see this as a significant expansion in the footprint that they're offering, where we'll be placed as a lead offer, which has changed from where we've been in the past.

That has more of a level playing field to us.

And it's driven off the success we've had since the relaunch and I think a testament to our ability to continue to deliver rapid level of innovation and customer satisfaction along with a high level of security that's required for that account.

Okay.

I guess just a follow-up question though.

Mitesh, as it relates to this ongoing kind of balancing act of investing for growth versus showing some operating leverage, just maybe give us an update as we're starting to look into next year, anything changing in terms of how you all think about weighing those 2 factors, particularly with some of the opportunities with these new areas where you might need to invest some, but just, yes, balancing this growth versus showing leverage.

Sure, Terry.

Look, as Dave said, we are very optimistic about both Avaya and AT&T.

And Avaya ACO is going to launch.

And so we'll cover it in 2 flavors, top line first and then bottom line, giving some visibility into 2020.

So look, ACO is going to launch in Q1 of next year.

And if you look at the way GTM is going to ramp after that and given the recurring revenue nature of the business model, we expect contribution in earnest towards the end of 2020.

And many of you have written about this, the impact of -- towards that and then 2021 and beyond.

And we'll give more specific guidance next quarter.

But thinking of more tactically on one of the -- in your models, you have to be careful about seasonality going from this Q4 to next Q1.

So that's more on the top line.

In terms of margin, look, if you look at the unit economics, we are seeing solid unit economics across all 3 pillars of our SaaS model, be it cost to book, be it churn, be it upsell.

And so when you have a phenomenon like that, along with a land grab opportunity, as you mentioned, Terry, with Avaya and AT&T, the bias will be toward reinvesting some of the growth dollars into R&D, innovation and go-to-market.

Plus we'll have to make investments into Avaya to make it successful.

But sticking with our profitable growth philosophy, we will expand operating margin, consistent with this year, by about 50 basis points.

So again, on one -- on a tactical note in the model, be mindful of the seasonality from Q4 to Q1 because there are some payroll taxes reset, whatnot in Q1.

So with that, overall, more of the same, more profitable growth from us, reinvesting the growth dollars to fuel future growth and make Avaya and AT&T even more successful.

Our next question today is coming from Nikolay Beliov from Bank of America Merrill Lynch.

Adding my congrats on the quarter.

Mitesh, the first question is for you.

I believe this might be the largest beat you've done in the quarter.

If you can unpack the drivers that led to the beat.

I think you beat by 5%.

I think it's the largest you've ever done, or at least recently.

Yes.

No.

Thank you, Nikolay.

You can get -- we can all get carried away with the largest beat.

So thank you for the compliment there.

But the quarter was -- the way I'll frame the quarter, it was strong across the board.

And I'll double-click on 4 or 5 specific drivers for the quarter.

Some usual drivers, some new drivers that came up.

The first one is the new logo strength.

We did have over $30 million deals this quarter.

And this is typically a seasonally slower quarter, so that was unusual to see.

Within the top deals, 70% of the top deals were net new logos.

So that further seeds future land and expand.

That's one.

If you look at the overall mid-market and enterprise strength, the deal sizes did get larger there.

So that's point number two.

Number three, Contact Center.

Contact Center had its best quarter, the strongest bookings quarter.

It grew triple digits, and so it was a record pull-through for us.

And fourth is, I would say, channel.

That's been a consistent driver for us.

70% of our $1 million deals came from the channel.

And the last one is linearity.

We saw a faster start to the quarter in Q3, so leading to more revenue dollars.

So all these 4 or 5 vectors did contribute to the upside.

If you look at the business model here, Nikolay, you've written about this, we have multiple vectors of growth at any given point in time.

And not every vector needs to work every time for us to put up good numbers.

This time, a lot of them worked.

So -- and we feel excited about layering on new drivers like Avaya and AT&T, which will enhance the future long-term durability for the story.

And a question for Vlad.

Well, I was just wondering about your opinion on Zoom Phone.

I spent some time looking at Zoom Phone at the user conference a few weeks ago.

The product looks pretty good.

And presumably, they're going to have international presence in a year or so from now and at a much lower price point than you guys.

If you -- if they become a disruptor in the space like disruptor in UCaaS, how do you defend your business model and go-to-market strategy against Zoom Phone?

Yes.

No, look, so firstly, anything about Zoom Phone, you should probably ask Zoom.

I'm much more expert on RingCentral.

But in general, we see it as a first-generation product.

It is like in international, as you know.

A year from now, okay, let's see what happens in a year.

Look, Zoom itself continues to be a customer, including on international and some other things.

So yes, we've talked about this before.

We've been at it for a decade plus, have hundreds upon hundreds of millions of dollars invested, have further wide moat, we feel.

And we think we'll hold our own.

We'll obviously continue partnering with Zoom on the video side.

And we believe that we have a strongly competitive and differentiated product on the voice side as well.

So what else can I say?

It is a very large market to state the obvious and probably more room under the sun for more than one product.

We already have competition in this space.

As you know, we've been holding our own against any and all competition.

And here, we intend to the same.

Our next question today is coming from Sterling Auty from JPMorgan.

So on the AT&T front, can you just tell us, who was the lead UCaaS solution that you're now replacing?

And is there any parts of AT&T where you're not going to be kind of the preferred offering?

We're becoming the lead offer across many verticals and cell segments there, the bulk of the business.

And they've had other solutions in the past.

And they're really focusing on Office@Hand at this point due to the cloud nature and the rapid innovation.

So it's definitely an expansion in the footprint that is being offered at AT&T, and they've been good partners throughout.

And I think it really shows on how we've been able to work with them and our go-to-market relationships and our technology relationships as we continue to invest in greater integrations into their network and into their processes and systems.

All right.

Great.

And then one follow-up, Mitesh, for you.

When I look at the fourth quarter EPS guidance, the one thing that immediately comes to mind is there probably needs to be some Avaya deal-related costs, not just for the deal but to prepare you for a first quarter launch.

Is there any way to quantify that or think about it?

Because I imagine if the Avaya deal had not been struck that maybe the EPS guidance would have been even higher.

Yes, it would have been higher.

And we are subsuming that investments for Avaya and that it's hard to quantify, Sterling, exactly so precisely.

But it's fair to say that our EPS guide, despite how strong it is, would have been higher had it not been for the Avaya investments.

And also, as I said, I was mentioning to Terry's question earlier, even in 2020, we will stick with our profitable growth philosophy and expansion consistent with this year of 50 basis points.

And we will subsume all of Avaya's investments given that it's economically very favorable to our unit economics.

Our next question is coming from Brian Peterson from Raymond James.

So wanted to hit on the new business execution, which has been impressive.

Just curious, any change in sales cycles, how those trended?

And Mitesh, anything you can share on the sales and marketing efficiencies this quarter?

I'll just take the first part of that.

Sales cycles have been consistent throughout, and we continue to see more opportunities.

I think that's what's driving the business forward.

I'll let Mitesh answer the second part.

Your question around sales efficiency.

Yes, that's right.

Yes, yes.

On sales and marketing efficiency, if you look at our numbers, the sales and marketing efficiency is getting slightly better despite the -- year-over-year despite our move upmarket, where sales cycles are typically longer.

And this is impacted by 2 to 3 trends, the first one being the overall ramp of the segment.

As segments mature, there is productivity gains to be had.

So that's one.

Second is we are seeing some higher productivity from the high-end enterprise segment from our reps -- ramp reps, which is where, again, it's the longest sales cycle.

So we are -- but we are seeing some efficiency gains there given that we have more products to sell like Contact Center and we have developed a brand recognition, especially in the vertical markets like retail and financials.

So that helps.

And the third one, which is a -- which is a hidden gem so to speak, is AT&T.

AT&T, much like Avaya, has a lower cost to book upfront, which helps our sales and marketing efficiency.

And if you put all these 3 trends together, it helps us save more profit dollars to fuel for future growth.

Got it.

Mitesh, maybe one follow-up for you.

Deferred revenue has some variability in the payment terms.

But can you help us understand how you look at RPO as a measure of tracking your business fundamentals and how that's tracked this quarter?

Yes.

Sure, Brian.

Yes, deferred revenue does have variability.

It gets impacted by the payment terms for sure, and that has an impact of moving deferred revenues quarter-to-quarter.

We give customers a choice to take monthly or annual payments.

Most of the customers choose monthly payments for us.

So -- but if you look at our overall customer profile, more customers are opting for multiyear contracts.

So if you look at ARR and RPO, the new 606 metric that does eliminate some of this volatility and does give a glimpse into the future result of the company, the RPO backlog grew about 50% for us.

So it's a very healthy backlog, and that should provide some visibility into the future.

Our next question is coming from Heather Bellini from Goldman Sachs.

This is Mark Grant on for Heather.

Mitesh, maybe you could just talk a little bit about the unit economics in terms of these partnerships.

You mentioned that the cost to book upfront is lower through AT&T and presumably through an Avaya as well.

But can you talk about kind of the margin impact over the lifetime of a customer?

Is that going to be similar to what you typically see on your own platform?

Or is there an advantage to you in bringing those customers direct through RingCentral over time?

And then just a quick one on competition, particularly in the enterprise and those 7-figure deals.

Any change to what you're seeing in those bake-offs or any key factors in why those enterprise customers are choosing RingCentral over others?

Yes, I'll take the first part and I'll let Dave answer the second one in competition.

In terms of the unit economics, Mark, not only is the upfront cost to book lower, the overall long-term margin profile is also higher because of the lower cost to book, one.

And second is even as you have these partnerships like AT&T, Avaya channel partners, the churn profile is better because the channel partners get paid on a residual basis to hang on to the customers.

So if you look at lifetime value or lifetime margin, the profit dollars are also higher for these partnerships.

So it's sort of a win-win for us to have a two-pronged approach with direct and the indirect side.

I'll let Dave answer the competition one.

And I think the question was why our enterprise customers selecting us, and it goes across the platform capabilities.

We mentioned that in our large $1 million TCV deals, more than 70% were choosing us for the open platform capabilities, another -- additionally, over 50% for messaging.

Obviously, our global capabilities give a multinational corporation unparalleled ability to bring all their customers onto one platform.

And our contact center capabilities continue to see very strong attach rates, especially across our large deals.

So enterprises are choosing us really across all those capabilities, and we see strong traction, both from an intent to buy as well as usage in those accounts.

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

I think last quarter, I congratulated you on your Q3 results.

Today, I'd like to congratulate you on your Q4 results as a forward-thinking analyst.

So I wanted to ask you about the overwhelmingly positive feedback that you've gotten from the channel relative to the Avaya move.

Can you just give us more granularity as to what you're hearing from the channel?

The channel is excited about the new product and capability that we're enabling Avaya with ACO that allows some advantages of Avaya phones and migration of customers.

It taps into a much larger opportunity overall of bringing that large installed base that's still legacy into the cloud.

We see this as another vector that the channel can utilize to help make that migration, whether through the ACO product or through RCO directly.

As a follow-up, relative to the AT&T, the lead opportunity, could you talk about what percentage of the lead you might have been seeing before and what percentage you might see today?

Just trying to understand the incremental benefit.

I don't think I'm going to quantify exactly, but I do see this as a significant expansion in that account with the ability to work across broadly all their core cell segments and verticals with AT&T.

Our next question is coming from Samad Samana from Jefferies.

Maybe first, RingCentral in the past few quarters has talked a lot about notable wins on the international side, and that seems to be really picking up.

Can you give us some more color on the international performance in 3Q and maybe how we should think about international going forward, both on a stand-alone basis and now working with Avaya as well?

And then I have a follow-up.

International, though -- Samad, it's Mitesh.

So international is a sector we -- or a lever we keep on investing.

It's now close to 10% of our ARR, and it's growing at a very healthy clip.

We did see -- in our $1 million deals as well, we saw a good amount of international contribution.

And 2 other things that are helping us.

One is Dimelo is actually helping open new doors alongside contact centers.

We did see a win with Renault, a renowned car manufacturer, which is now starting to standardize on Dimelo all its social media profiles in multiple countries.

So that's -- that trend is starting to pick up.

And we are seeing this traction, we are seeding future growth with more reps internationally, which will take time to grow some trees there metaphorically, but we are seeing exceeding growth there.

So overall, I think it's a very important emerging vector.

And if you sort of layer on Avaya on top of that with its complementary international footprint, I think it could be a future dial for us.

Great.

And then, Mitesh, you had mentioned the linearity in Q3 and how that drove revenue earlier.

And I just -- because we've gotten a question from investors, I just wanted to get some clarification on the Q4 guide because it's about plus 3% quarter-over-quarter.

You guys had stronger Q4 uplifts usually.

So did the Q3 linearity maybe impact some of the seasonality into 4Q and changing some of the revenue seasonality in the guidance?

Sure.

No, I think no changes, Samad.

3Q was not at the expense of 4Q.

I think we feel very good about 4Q heading into the quarter.

And I think we feel very good about the guidance we've given.

Next question is coming from Nandan Amladi from Guggenheim Partners.

So you talked about 30 7-digit TCV deals, over 1/3 in targeted verticals.

But I think you also mentioned, Mitesh, that 70% of them were new logos.

Can you talk about the land-and-expand strategy as it relates to these large deals?

What is the typical mix you're seeing with new logos versus upsells, particularly in the 7-figure segment?

Yes.

Sure, Nandan.

So the new bookings from existing customers or upsells were consistently above 40%, even this quarter.

And we saw -- actually saw an uptick sequentially, which was a positive trend.

And there are 2 key trends that are impacting this.

One is we are seeing not only upsell from seats, but we're also seeing cross-sell from products.

So Dave, in his prepared remarks, gave an example of Pacific Dental, where this is actually, believe it or not, the fifth $1 million deal for Pacific Dental.

And it started as dental offices.

Then it went to corporate headquarters and now contact center.

So that's the power of your land and expand because we typically don't go wall-to-wall when they go in.

So it does help for future visibility.

That's one trend.

And second is we're seeing a cross-sell from both sides.

What I mean by both sides is customers landing in the UCaaS and then going to contact center, which is your Pacific Dental example.

But we also saw customers like Crawford this time, which started in the contact center space and then sort of reverse cross-sold, if that's a word, like reverse cross-sold in UC.

So those are the 2 trends that are helping.

But as you hit on the precursor, Nandan, in your question, the precursor to all of this is new logo strength.

And 70% of our $1 million deals were new logos or net new logos, which should actually lead or help future expansion as we go along.

Yes.

But in the context of third quarter being a slower quarter for you, with that 70% new logo mix, how does that relate to past history and your expectations for the future?

Yes.

No, it's been trending pretty high around that same 70%, 75% range.

So I always -- every quarter, I try to temper expectations, saying, "Hey, guys don't think every quarter is going to be like this." But we were -- we did see seasonally -- seasonal strength in Q3 even though it's typically slower.

So it was very consistent with previous quarters.

Our next question is coming from Meta Marshall from Morgan Stanley.

Great.

Since you mentioned traction with AT&T, I just wanted to get a sense of -- are you seeing enterprise customers or SME customers or just kind of what the overall customer makeup has been there?

And then second, just on maybe Avaya Partners who were already selling RingCentral, just any feedback you've gotten from them and whether they would continue to kind of sell RingCentral or wait for the ACO product in this kind of 1- to 2-quarter time period where ACO is announced.

Yes.

On AT&T, historically, we've seen a pretty comparable mix of customer size to ours in -- since the relaunch, maybe a bit smaller just because sales cycles are -- take a while to mature.

But with this expansion, I think it will provide a great launching board to see that equalize again where their customer size should equal our customer size over time.

And the second part of your question was Avaya, can you restate that?

So just on the channel partners that are already overlapping, so the Avaya partners that already sold RingCentral?

So they'll be able to sell both products, both RCO and ACO going forward, number one, representing Avaya in the ACO and representing RingCentral in RCO.

Our next question is coming from Will Power from Robert W. Baird.

Great.

Okay.

Yes, congratulations on the AT&T expansion.

I guess maybe just a quick follow-up there.

I guess, Dave, as you think about the enterprise opportunity at AT&T, I think historically, because they had a big focus on hosted solutions covering their own data centers using Cisco, are you sensing a shift where you spend -- what might have been those historical deployments that they maybe are more open to cloud solutions and using you all, instead of kind of a Cisco hybrid solution they might have used in the past?

I mean, could that be part of the bigger opportunity here moving forward?

Yes.

It may sell other solutions even today.

But the -- I do think the change is there is a certain level of rapid innovation that you get in a cloud solution.

And we've been able to meld that with meeting very high security requirements for them.

And I think those advantages you see as well as the open platform capabilities that are so critical for enterprise customers are key aspects and features that they want to bring to their customers and why they're moving in that direction.

Okay.

And are there any marketing costs or other investments required from you all to help get that up and growing in a bigger way?

So the NICE thing is already a current account.

So we already have a team dedicated.

There will be an expansion of that team, but I think it's incremental in size with the incremental opportunity.

And it's all contemplated in the guidance we've given.

(Operator Instructions) Our next question is come from Bhavan Suri from William Blair.

It's Matt Stotler on for Bhavan.

Great results.

So I guess I'll choose my international partnerships question here.

Would love to get some color.

You talked a lot about AT&T and Avaya.

Would love to get some color on the Westcon partnership, how it's rolling out in the U.K. and the EU.

Any details you can provide there?

And how is this motion in the U.K. representative of your overall strategy for expanding internationally?

So the -- there was a question on Westcon.

We did an announcement with SYNNEX as part of Westcon.

And we're still early in that rollout, obviously.

So that's a new relationship.

We also had a relationship with ConvergeOne that was announced.

So we continue to expand across multiple partners and internationally with our partners.

And we think it's an important part of delivering those enterprise customers, both globally and domestically.

Our next question is coming from Brian Schwartz from Oppenheimer.

Either for Mitesh or Dave, about the strength in the contact center business in the quarter.

Just wondering if more of that strength is being driven by the volume of deals that you guys are doing in the quarter or if it's being driven more by the size of the deals that you're closing.

I think it's been driven [by both] the size as you get into larger customers, there's a greater propensity to have needs for both.

So we see strong strength there.

There's also just greater familiarity with our own sales team and selling those products and a longer relationship with customers as we see those cross-product sales like we saw at Pacific Dental moving from our traditional products into contact center.

So I think we're seeing it from multiple vectors in the market today.

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

Yes.

Just touching on the customer engagement portfolio again.

So is -- are the bookings in that category over 10% or over 20% of sort of total bookings at this point?

Can you give just any color on sort of the magnitude of the bookings you're seeing across your sort of engagement portfolio?

Engagement as in the Dimelo portfolio?

Dimelo...

Just all of your contact center, Dimelo...

Yes.

Overall, Mike, it's about 10-ish percent of overall ARR.

And bookings is a higher percentage.

Our next question is coming from Matt Van Vliet from Stifel.

I guess as you're looking at the vertical selling strategy, is there a higher mix of direct sales involved there or the partners -- channel partners still integrally evolved?

And I guess as you look forward, are there any other verticals right now that you have identified that maybe you're going to use the same strategy to build out given the recent success?

So the vertical selling strategy utilizes channel, also similar to the rest of the business.

So we do see channel partners playing an important role in driving that business.

We have dedicated resourcing against health care, financial services and SLED.

We continue to grow that.

Right now, those are our core verticals we're targeting.

With those dedicated resources, we obviously are also very successful in others like technology and retail.

There are other examples, but for now, we'll continue along the path of growing those current teams.

Our next question is coming from Rich Valera from Needham.

A follow-up on AT&T.

Can you give us any additional color on what types of enhancements you might take or technological developments you might be making on the product and what impact that might have on the growth of that business?

In reaching across all their verticals, there's a number of product specializations we do.

Given our open platform, that gives us an advantage of doing those things of creating both vertical-specific SKUs as well as freeing to bear our integrations that we have in those markets.

We're also focused on mobility and finding ways to integrate with their world-class network.

Our next question today is coming from Catharine Trebnick from Dougherty & Company.

Awesome quarter.

Now are you looking to do the same thing with BT or maybe Bell Canada as you've done with AT&T and going deeper with your products?

Our current accounts are BT and TELUS, and we continue to -- we've introduced additional products with BT like Contact Center recently.

So we do look to bring our full portfolio into each of those accounts.

And as that continues to grow, that creates additional opportunities within those.

And with BT, we've also recently introduced into their corporate segment.

So there is incremental opportunities, of course, that we're pursuing at all those accounts.

Our next question is coming from Ryan Koontz from Rosenblatt Securities.

I wonder if you could shed any light on the Verizon account opportunity.

Is that something you're working on?

It's not a current account.

So we don't discuss prospective accounts.

Thank you.

Ladies and gentlemen, that concludes our question-and-answer session.

That also does conclude our teleconference.

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