Welcome to RingCentral's Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Clyde Hosein, Vice President and Chief Financial Officer for RingCentral. Thank you, Mr. Hosein, you may begin.

Thank you. Good afternoon and welcome to RingCentral's fourth quarter and year-end 2014 earnings conference call. I'm Clyde Hosein, RingCentral's Chief Financial Officer. Joining me on today's call are Vlad Shmunis, Founder, Chairman and CEO; and David Berman, President. Our format today will include prepared remarks by Vlad, David and I followed by Q&A. The primary purpose of today's call is to provide you with information regarding our performance for the fourth quarter and full year 2014 along with our financial outlook for our first quarter and full year 2015. Some of our discussions and responses to your questions may contain forward-looking statements including statements regarding to our expected financial results for the first quarter and full year of 2015, our future plans, prospects and opportunities, trends in the business communications market, our expectations regarding our current and future carrier and other reseller relationships, our planned APIs and platform initiatives, our growth strategies, current and future market position and expected growth. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements and projections for a variety of reasons including, but not limited to, general, economic and market conditions, the effects of competition and technological change, the success of our market and sales and retention efforts and customer demand for and acceptance of our products and services. A discussion of the risk and uncertainties related to our business is contained in our 10-Q for the quarter ended September 30, 2014 and filed with the Securities and Exchange Commission and is incorporated by reference into today's discussion. We disclaim any obligation to update information contained in our forward-looking statements whether as a result of new information, future events or otherwise. I encourage you to visit our investor relations website at www.ir.ringcentral.com to access our fourth quarter 2014 earnings press release, our non-GAAP to GAAP reconciliation, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral. With that, let me turn the call over to Vlad.

Thanks, Clyde. Welcome, everyone and thank you for joining us on our fourth quarter and full year 2014 earnings call. Before I discuss our results for the quarter, I would like to remind investors of our vision and the very large market we're participating in. Traditionally business communications has consisted of a series of inflexible, expensive and different systems, on premise BBS solutions which are still prevalent in most businesses today. The emergence of the cloud and the SaaS business model combined with the proliferation of smartphones and tablets as well as the corresponding new paradigms in user experiences is enabling a revolution in how people communicate. RingCentral is at the forefront of this paradigm shift. RingCentral's Cloud Communications platform was designed from the ground up specifically for today's dispersed and mobile workforce. We're integrating all the ways employees communicate, voice calls through mobile and desktop devices, text messaging and audio, video and web conferencing from a single easy to use carrier grade SaaS platform. Further, we're developing APIs to integrate our platform with other cloud solutions to better reflect the way we all work together. By doing this in a unified fashion, we also substantially reduce the time to implement and total cost of ownership for our customers. Our solution provides a compelling value proposition in not only lowering both upfront and total overall costs but improving employee productivity by enabling businesses to tie together all their locations and mobile employees under the umbrella of a single easy to use cloud-based solution. Estimates for the annual size of the business communications market range from over $15 billion in the U.S. to more than three times that on the worldwide basis. The penetration of solutions like RingCentral Office is less than 5% globally with little competition up that offers all…

Thanks, Vlad. Throughout 2014, we focused on our three-pronged growth strategy, adding larger customers, growing distribution channels and expanding internationally. Let's discuss each one in a bit more detail. The additional focus and resource we've dedicated to pursuing larger customers continues to yield results. We signed a number of customers in the 400 to 500 user range in the past quarter including Alliance Security and Seagull. Once again we grew Office MRS from customers with 50 seats and above by over 100% year-over-year. This category represented over 20% of our new Office bookings for the quarter. We're dedicating further resources to this effort in 2015. Just last month we opened another office in Charlotte, North Carolina, to better serve larger customers on the East Coast. We also continue to leverage our indirect channels which accounted for roughly 20% of our total revenue in Q4. AT&T is our largest customer across the 10% threshold in 2014 representing over 11% of our total revenue. More recently we're excited to announce the TELUS launch in Q4. While the rollout is just starting, they have customers live on the platform today. We continue to anticipate BT's launch in the first half of this year. On the indirect side one example of a new customer win was a multi-year contract with a dental practice with 400 users that we won in conjunction with AT&T. This three-year contract will allow their staff to bridge locations inside and outside of AT&T's network seamlessly and with the unified platform, a key function that their previous legacy solution was unable to provide. Internationally we're seeing progress from our UK office. They're focused on both increasing our direct book of business and supporting our relationship with BT. In addition we responded to the needs of our customers with global footprints by recently launching international phone numbers. This capability allows customers to expand their connectivity across multiple countries. Overall we're pleased with the progress that we made throughout 2014 and the momentum of the business. Our increased focus on larger customers is working and we're in the very early stages of ramping with two new carriers in two new geographies. I'll now turn the discussion over to Clyde.

Thanks, Dave. As Vlad and David has outlined, 2014 was an outstanding year for us with a strong finish in the fourth quarter. Total revenue for the fourth quarter was $61.9 million, up 37% year-over-year and 9% sequentially from Q3 as our growth initiatives continue to generate strong results. This was above our previous guidance of $59.5 million to $60.5 million. Services revenue grew to $56.4 million, up 37% year-over-year and 9% sequentially, while product revenues grew to $5.5 million and remained roughly 9% of total revenue. Total company annualized exit monthly recurring subscriptions grew to approximately $237.5 million, up 37% year-over-year and 8% sequentially. The annualized exit MRS for our RingCentral Office product grew to approximately $170.5 million, up 52% year-over-year and 11% sequentially. Our overall net monthly subscription dollar retention rate was over 99% in the fourth quarter, improving for the fifth consecutive quarter due to the increase in mix of Office and our success with larger customers. Office net monthly subscription dollar retention was above 100% once again. While Office is our flagship product and a key driver of future revenue, I do want to highlight that our other products also provide a steady flow of recurring monthly subscriptions with little investment as they are part of our unified platform. These products exited Q4 at $67 million in annualized monthly recurring subscriptions. Before I move down the income statement, I want to remind you that my commentary will be focused on non-GAAP results. A reconciliation of all non-GAAP to GAAP results is provided with our earnings press release issued earlier today. Service gross margin improved to 73.3% in the quarter and is the second consecutive quarter of exceeding the 70% level that is typical of other leading SaaS providers. This is an expansion of 430 basis points…

[Operator Instructions]. Our first question comes from the line of Brad Zelnick from Jefferies. Please proceed with your question.

I've got two questions. First on product mix. We're seeing continued traction of Office and that coincides with strong renewals. As this is a third consecutive quarter, you've said monthly renewals are over 99%. Can you talk about how these are related and even why you believe RingCentral has such a high renewal rate especially given your SMB exposure?

So we've seen continued improvements in retention fundamentally based on several factors. So firstly as our product continues to evolve and mature, our customer satisfaction numbers are improving and this is amplified by the fact that as we're moving up market, the number one reason for churn namely customer mortality that is going away naturally as we go up market. So we actually expect these trends to continue as our Office growth meaningfully outperforms our overall growth. And in particular, as our 50 plus Office growth which is over 100% for as we've reported for several quarters now is better than double growth of Office overall which is in the 50% range.

And Clyde on gross margins, they've now increased for six consecutive quarters and you're on the doorstep of 70% which we look for in a SaaS company. And other than scale and I know as you look out to Q1 you mentioned a number of the seasonal factors that'll come to play, but beyond that as we look further out to next year and beyond, can you help us understand how this is evolving and where it might go? Thank you very much, guys.

The overall gross margin grew I think 500 points year-over-year in Q4 and 300 overall for the year. I do want to focus on, Brad and other investors is the service margin, that came in at over 73% and it's growing very nicely. That's where I think a fair amount of the leverage is. We've been investing in infrastructure and other areas to improve our transport cost. That's part one. Part two it's a multi-tenant SaaS model and so as you add customers you don't need to add as much, so that trend is going to continue. And we mentioned Brad as you pointed out Q1 is a typical seasonal down tic, but you should continue to see improvements thereafter that as I said in my prepared remarks. And so it's a good news story. The team has done a great job and continue to drive it.

Our next question comes from the line of Bhavin Suri from William Blair. Please proceed with your question.

I just had a couple. First on the partner channel it was nice to see AT&T now 11%. When you look at the pipeline for those partners, maybe you can give a little color of how that's growing and sort of internationally as you expand, what other regions seem attractive that could leverage the platform today?

So yes, AT&T did close the 10% threshold last year and as I think we've been very consistent in every call. Every one of these carrier relationships and again to reiterate we now have three major carrier relationships that we've announced. We're the only pure play SaaS provider with even a single carrier relationship, so that's the good news, but also reality is that they do take time to develop and as is inherent in the SaaS model, you start small and then it just keeps on growing. And especially now that you've seen both our net churn as well as gross churn and retention numbers, this is a very sticky service. So I think answer the question what you're really asking here is when will it be of scale? It's coming, but it's going to be awhile. It's a little bit hard to predict. BT has not yet shipped, TELUS started with -- but not a very entire footprint yet, so that's coming. So we're very, very optimistic and especially based on the AT&T experience. As we see our AT&T partnership, I think we're into our fifth year now and it's going strong. So we certainly learned a lot already and we think that AT&T was a pretty hard nut to crack, but we think we have the thing a little bit basically under control now. Second part of your question is as far as other geographies. Again, we've been I think very consistent from day one that we see this as a truly international global opportunity and businesses worldwide communicate and traditional communication systems are just outdated at this point. So we definitely see opportunities elsewhere beyond the U.S. and beyond Canada and beyond the UK. We do have infrastructure in place today already with investments already made that allows us to cover North America and Western Europe and we'll be concentrating in these areas. But also opportunistically we're engaged in a number of fronts and again, there is pretty strong interest I think throughout in moving business communications to the cloud and carriers worldwide I think are seeing that opportunity.

And then maybe one quick one for Clyde which is as you look at this percentage of resellers especially guys like AT&T that are larger that are driving and helping land larger customers that are helping reduce churn, as you think about that 20% today going to say 30% or 40%, how much leverage do you get or any color you might give us on how much leverage you get on the sales and marketing line from those guys becoming meaningful?

I think it's the same similar to what the overall platform is. I don't know that it would be, we haven't projected 30% or 40%, but they have been growing consistent with our overall growth. But we do pay sales and marketing for various carriers and the like, sales and marketing. So I don't know that there's any meaningful differentiation between the two. Overall, we continue to drive marketing for our partners and of course they have their own sales force. So I would consider it growing consistent.

Okay and one quick last one for me. As you lay out the road map for the platform and the strategy through 2015, any color inside of how you think about the context and/or opportunity? I know it's already come up with conversations with investors, but be great as you were building out that strategy here what you guys are thinking about that space?

I'm sorry the question is what about the platform?

Contact center offering or moving into that space.

Sure. So we have a small percentage of our opportunities ask for some type of call center or [inaudible] center capabilities. When they do ask, they seem to be interested in 5% up to maybe 10% of the entire opportunity within those accounts to be given that type of contact center capability. And our approach here is basically twofold, so a good portion of those interests we're able to address directly today with our native technology. As a reminder, we offer multiple tiers of service and our higher end tiers in particular premium and enterprise tiers, they do have quite a bit in the way of contact center functionality. So we have multi-level IVR. We have multiple Qs, we have reporting and analytics and of course we operate all with seem less integration with core PBX through the cloud functionality. Now, there are some accounts that require more of a dedicated contact center and we've been very successful addressing these in conjunction with partners. So we have a number of competitive wins whereby we were able to bring in one of the major established contact center vendors and this seems to be working quite well. So we're certainly not losing any business with this. I would say winning at least our fair share is the opportunity.

Our next question comes from the line of Brian Peterson from Raymond James. Please proceed with your question.

Just wanted to hit on some of your sales force investments and I know you referenced some tier changes you've made there. What inning are we in, in terms of recognizing some of those benefits and would you expect a big improvement in efficiency in 2015 or should that be offset somewhat by continued investments in the sales force?

We're ramping the sales force. We built out the Denver office and as I mentioned in my opening remarks, we've opened an office in Charlotte to further be able to address the needs of our larger customers. So we're in the process of ramping it, that part of the business is growing fast, it's growing over 100% year-over-year and we're seeing increased lifetime value in that particular segment of the market. So I would say it's still early but we're having very good progress there.

And my second question is on AT&T and I appreciate the 11% contribution for 2015. Is there any way you could give the linearity on that because I would think that the Q4 contribution would actually be a little bit higher than 11%?

So Brian, it was for 2014, not '15. So it was reporting for all of the year last year and we report only on an annual basis under our agreement with AT&T. So we can't give you color within that.

Our next question comes from the line of [inaudible] from Bank of America. Please proceed with your question.

50 plus users is becoming, obviously clearly a main driver of the business, just wanted to get some color on the win rates there and where you're seeing most in the field.

So win rates, it's a little bit hard for us. Frankly, we don't always know who we're up against. We don't always know which situation is competitive and all I can say is that from what we understand, we have by far the industry leading growth. So and also meaningfully a larger overall revenue at this point on a recurring basis. So would seem to imply that we're winning more than our fair share or at least our fair share and being that our 50 plus segment is rapidly outgrowing everything else and again to reiterate, 50 plus has been consistently growing at over 100% year-over-year as compared to Office as a whole which is in the 50% range. So obviously, we're being quite successful in that space. As far as competitors are concerned, again by and large, competition comes from established legacy players. These are your Avaya, Nortel, Cisco, On-Ramp, ShoreTel as well as various other systems in the [inaudible] sector. And those are really the folks that we're replacing by and large. In the cloud space, as I think you know, the person that would be closest to us would be 8x8. But as you know, we're growing quite a bit faster and we think there are reasons for that. So frankly we expect that effect to continue.

And I had one for Clyde. Clyde, obviously great operating margin improvement breaking even Q4 this year. Just want to ask where the cash flow from operations is going to track the operating margin trajectory or are there other moving pieces there?

It should reasonably track it. From quarter to quarter as you saw last year, Nicoli, particularly in Q1 and Q3 when we pay some software licenses in particular they might. So on a quarter-to-quarter basis you're going to see some change but it should generally track the operating profit.

Our next question comes from the line of Heather Bellini from Goldman Sachs. Please proceed with your question.

This is Nicole in for Heather. I just had a broader question about your partner strategy. While you partner with AT&T, TELUS and BT, Verizon uses your competitor BroadSoft. Did you compete for the Verizon deal or were you restricted because of your partnership with AT&T? And how do you see this landscape playing out? Will we see more telcos partnering with Ring in your competitors instead of them being a part of each of those companies?

I think the short answer to the first part of your question is we started a relationship with AT&T on an exclusive basis. So no, Verizon deal was not competitive at the time. And as far as -- I'm sorry, what's the second part of your question? How do you see this with other carriers?

Yes, how do you see the landscape playing out? So with telcos partnering with you and competitors, do you see them just partnering with you guys or instead of being a part of these companies?

A part of these companies? Well if I understand the question correctly, so telcos I think fundamentally have one decision they have to make is whether or not they want to host this technology internally in which case BroadSoft has a well-known, well proven software stack, but the carriers need to host it. Carriers need to provide billing. Carriers need to provide all of the on boarding integration and it becomes part of carrier infrastructure. So what we're seeing is that many carriers and clearly we have the three examples we've announced already are basically deciding to go with an over the top solution like RingCentral and the benefits that is offered them is no CapEx, no specific to do for them as far as actually having to carry the heavy load of integrating this technology internally. But honestly more importantly than even that is the fact that really do have a product that is much better accepted by the end user community. We consistently get high marks on usability, we consistently get high marks on our ability to turn up customers instantaneously. And we already discussed our retention patterns and in particular was in the up market space where our even gross basis our churn is in single digits, right? So this is why they're going with us. We believe that this trend will continue. We believe that as other carriers experience what AT&T has experienced in that name as you can build a very meaningful and very quickly growing business based on this type of partnership, we think that other carriers will be making similar choices.

And for Clyde, you touched upon this but with more customers paying up front, could you discuss what percent of customers are still paying on a monthly basis? And as you sign larger enterprise customers, how do you see this shifting?

We didn't disclose the percent but it has meaningfully improved from say a year ago about double and so I think the trend is more important than absolute. It's certainly double digits but the trend is showing that and that's reflective of a couple of things. One is as we move up market, larger customers are willing to prepay, so it's more reflective of the underlying business trends, and its improved substantially. Haven't disclosed a percent, but it's double digit and its probably doubled -- the rate has doubled from a year ago.

Our next within comes from the line of Mike Latimore from Northland Capital Markets. Please proceed with your question.

Just curious any new view on acquisitions as part of the strategy? Is it important that you focus on technology tuck-ins or some general color on potential acquisitions would be interesting.

So obviously we haven't announced any acquisitions. Look as you can probably imagine there are a number of opportunities out there, certainly people are calling us. So the way we look at this is we're growing fast enough and the market is pretty amazing. Again remember, we're talking about tens of billions of dollars no matter how you look at it. So there is a huge amount of runway and we're growing very, very rapidly. So to acquire customers for us is a little bit hard to justify because many times by the time that we would conclude the acquisition we would have outgrown it anyway if we were just to concentrate on our core business which is what we're doing. As far as technology tuck-ins are concerned, we’ve a meaningful investment into R&D. If you round the numbers you can see that it dwarfs our competition and their investment into R&D on an absolute basis. So again, we're certainly open and I don't want to be misleading and tell you that we'll never do an M&A or that there is no technology out there that wouldn't be of interest to us, but just for now we haven't been able to find anything frankly that makes sense. I mean we're growing nicely, we’re well of our way to profitability. There is no shortage in opportunities out there and we have a unique dual prong strategy whereby we have both a stable and growing direct customer base, as well as partners like AT&T promoting us heavily. So we think we're in a good spot.

And then on the Office segment, nice to see the growth rate there stabilize in the low 50% range. That growth and the main factor behind that stabilizing growth is more mid-market customers coming online, is that the way to look at it?

Well, we think that low 50% growth on a $170 million business is maybe not that bad, especially if you consider the very strong retentions as we already shared and when you look at 50 plus or the fact that churn in debt on growth basis is less than half of Offices in the whole, again there seems to be a pretty good spot to be in. Now having said that, again we've been consistent I think over at least several quarters now. We're moving up market. Office in itself as a whole is an up market initiative for us. It is now responsible for vast majority of our new acquisitions, I think 90% range or so. And so that's with almost all of our business fairly soon will be Office. Within Office 50 plus is outpacing by a factor of two and on a growth basis and it is outperforming by a factor of two on retention basis. So you tend to see the direction in which these are factors are growing.

Our next question comes from the line of Brian Schwartz from Oppenheimer. Please proceed with your question.

I just have two questions here. First question, Vlad in your opening comments, you talked about more about opening up the technology platform and strengthening your APIs. You talked about the innovation that you'd done with Goggle here over the last several months, that's interesting. You know that could certainly change the pace of innovations for the business here in the future since most of the development had been coming internally through your R&D department. The question that I wanted to ask you is how do you think about weighting the pace of your future development, your future innovation between your internal R&D department and your technology partners through strengthening APIs?

I think it's a good problem to have, right? So our goal is to have basically an open platform whereby other people can integrate their technologies and we've shown our ability to work closely and inter operate with a number of major SaaS players already. Google being the latest, but as you know we have Salesforce and Box and we have a few other very interesting names that we haven't announced yet, but stay tuned. Now so we definitely expect these efforts to continue and our efforts meanwhile will be going into fortifying our platform, making it easier for people to integrate, allowing deeper types of integration and integration interconnection, so all of that will continue taking place. As well as there are things that frankly only we can do to our platform. So anything having to do with high availability, anything having to do with POS, those types of things. Geographical expansion we cannot rely on partners to do that. And maybe this is even a good point, place to remind people that our entire technology stack, we've developed it. We're using standard off the shelf hardware but software stack has been developed by RingCentral. So as far as additional partners are concerned again as we make the platform more and more open and easier to access, we absolutely expect for very interesting applications to be developed on it, so we'll have to see.

And the other question I had and this is either for Clyde or David, I just wanted to ask you about the international expansion plans here, the strategy and the 2015 forecast. Just wondering Clyde, how much expansion internationally is built-in the forecast and where are you investing here internationally in 2015? And last, how quickly should we expect those investments to take hold for the business? Thanks.

As Dave mentioned earlier, international is part of our long term plan. Let me remind folks that the U.S. opportunity is huge. The estimate is between $15 billion and $25 billion, so it's certainly an opportunity but over time international becomes a factor in two flavors. One is we announce the UK just over a year ago and we've been very successful there. Some of the successes we had last year was in a direct area. We had Imago, Ingram Micro and we of course, we announced BT. So it was just a simple example of the success we've had and that's going to continue. It's a SaaS model, so it's going to be slow to hit the revenue line, but new acquisition it's doing very well for us. Vlad mentioned expanding beyond that as we build out the platform. But more importantly, as we grow up market what we see is a lot of large customers liking the solutions and now they want to integrate customers in other countries into the platform. So that's going to help drive us through customer pulls into a number of geographies where we might not have been otherwise thinking. So international is important as this thing gets played out, as customers get the benefit of our cloud solutions, they're asking for it in many other countries where we don't participate in this. So that becomes as to accelerating our road map.

Our next question comes from the line of Aaron Schwartz from Macquarie. Please proceed with your question.

Had a quick question, you spoke about the ASP uplift in some of the larger 50 plus seat wins that you're having. Can you just talk about the product tiers in terms of the adoption there? And what are you seeing if you could quantify user pricing in that bucket of deals first, maybe the broader base of business, just trying to assess the ASP verse unit uplift there.

We offer three pricing tiers, standard, premium and enterprise. And you could pick either/or but each of those are about $10 more per person per month so it's meaningful in terms of it. As we move to larger customers, what we're seeing is more of those customers are taking the premium, one of the two premium additions, either enterprise or premium so that's going to add to our ASP. Our ASP year-over-year has gone up meaningfully, high single digits maybe a little bit better than that and it's partly because of the larger customers as you do. As we move up market and you heard a lot today about doing that, that trend of it's going to keep moving as they do higher tiers. Now larger customers, a thousand seat customers going to pay on a per unit basis less than say a 50 seat customer, but they tend to buy more. So there is a couple of dynamics that we need to manage through. But in itself larger customers tend to buy more and more of the premium additions and that drives ASP up.

Okay and secondly if I could real quick. In terms of the sales hiring plan for '15 versus '14, I know you're not going to give us metrics, but directionally do you expect to increase the net number of sales folks you hire or will it be sort of flattish or down or can you talk directionally about your plan into 2015? Thanks.

Yes, we're going to continue to invest up market and grow that segment of the business. So we're adding headcount there in our Denver office and I mentioned that the Charlotte office as well the East Coast presence can have us closer to the customers out there. So we're going to plan on growing that and adding more sales heads.

This is all the time we have for questions. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.