RingCentral, Inc. (RNG) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to RingCentral First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darren Yip, Director of Investor Relations for RingCentral. Thank you. Mr. Yip, you may begin.

Thank you. Good afternoon and welcome to RingCentral's first quarter 2016 earnings conference call. I'm Darren Yip, RingCentral's Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; and Clyde Hosein, Chief Financial Officer. Our format today will include prepared remarks by Vlad and Clyde followed by Q&A. The primary purpose of today's call is to provide you with information regarding our performance for the first quarter 2016 along with our financial outlook for our second quarter and full-year 2016. Some of our discussions and responses to your questions may contain forward-looking statements, including statements regarding our expected financial results for the second quarter and full-year of 2016. Our future plans, prospects and opportunities, trends in the business communications market, our expectations regarding our expansion internationally and up-market, our partner relationships with our indirect channel including players and bars, the expected benefit of our integrated partnership, open platform, the Glip and Contact Center products, and our Global Office solution, our new phone distribution model, and our and our growth strategies, current and future market position, and expected growth. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements and projections for a variety of reasons, including but not limited to general economic, and market conditions, the effects of competition and technological change; the success of our marketing, sales and retention efforts; and customer demand for an acceptance of our products and services. 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. We disclaim any obligation to update information contained in our forward-looking statements whether as a result of new information, future events, or otherwise. I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings press release and slide presentation, our non-GAAP to GAAP reconciliation, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral. With that, let me turn the call over to Vlad.

Thank you, Darren. The first quarter was a great start to 2016 for RingCentral. We delivered strong top line growth combined with continued margin expansion. Average ARR or RingCentral Office grew 45% year-over-year. RingCentral Office is about a $272 million recurrence revenue business and represents over 95% of our net new business. Underpinning the growth of Office were key three drivers. First we're successfully executing [indiscernible] market. Second, we had the strongest quarter in our indirect channel and third we are beginning to see initiation traction in multinational enterprises with our Global Office division. The cloud communications market has reached strategic point. After several years of the gradual shift to the cloud we believe the debate between on premise and cloud is finally over with the evidence that the balance first steps to the ground. On-prem is finally acknowledging the shift. They are trying to give it their business model to accommodate the crowd. As the event begins to talk more about cloud it is of interest that derives confidence continues to ride. Likely the competitors can talk about the future that is two to three years away. RingCentral is already here with the platform that is market rating and focused with no direction in our mid-market. It's hit an inflexion point for RingCentral since last year with title stand coming up meaningfully. For the first two quarters our mid-market ROI has exceeded that of more business. In order words it' now is more cost efficient for us long term to acquire a customer with over 50 employees than as in the past. This is a momentum and will expect till April with our enterprise account down the line. On the interest side our adaptic to the new business model but every cloud solution is will hold it. This validates the specific point that I mentioned earlier, which is an outstanding quarter with us generating significant new business in Q1. The overall total addressable markets remained confused, under penetrated. Gartner estimates that close to a $1 billion was spent on on-premise based telephony over the last four years. On-premise solutions primarily were [indiscernible]. The stamp where the market is much larger. It includes other areas of the specification including messaging, collaboration, contact center and VVA and other capability. Additionally our unique open platform enabled integration to custom workload and other best of this offer. Under this by our unwavering commitment to technology leadership the other three main growth drivers does not change. These are one, expenses of market. Two, international reach and three, strong execution with our channel partner. In the first quarter we are continuing to see good progress in all of these areas. The progress are marked. As I mentioned expansion of markets continue to show great progress in Q1 in the fiscal first due to market segments the successful expansion into large enterprises has driven annual revenue price well over 100. This segment now account for about 35% of RingCentral Office bookings up from about 30% last year. Also I am proud to announce that we have now doubled customer with over seven figured contemplated. All this has combined led to ARR growth for this segment to be over 100% year-over-year for the eighth consecutive quarter and this on a much large base. ROI for customers with 32,000 employees is a best across all our direct selling sector. This is one industry will continue expanding up margin resulting in high quality revenue with attractive return. This also gives us extra confidence in our enterprise segment namely with customers with over 1,000 computer. We believe this segment will follow a similar path and we are positioning ourselves to continue. In Q1 our sales team had its best ever quarter thus introducing this concept. For example, Europe as you know, we will now be expanding our footprint there to include our global office feasibility as well as our competitor. The install base continues to grow and provide an insulated more predictable ready to grow more than start of the group gain from existing customer, we expect the land and expand opportunities to continue to increase as we install the upmarket adoptions. We also continue to expand longer term contract, greater than two-thirds of net new Office bookings potential customers opting for annual or multi-year agreement, as a result more than half of our Office install base is now under contract. Second, expanding our international region, during Q1 we announced an expanded international footprint with our Global Office product, this is a very important growth driver and key differentiator in the enterprise segment connecting multiple on-premise legacy system compounded by multiple geographies is very complex and expensive. This also result in full user and administrator experience. Results of Global Office stop this pain point. It provides [indiscernible] and local in-country experience while being globally connected together on a single cloud communication provider. This sculptor give good momentum with the boot into multinational enterprises. In the short period of just three months installing out our Global Office project overriding that by hundred multinational companies on Global Office. One such example is that a leading provider of Enterprise-Ready build the platform. Total works looking for the solution quickly extend its present in different geographies while not overburdening the IT staff. We won the deal by providing very abroad a local user experience while being globally connected together. In addition, we also displaced their existing competent provider with our cloud solution that is closely integrated with [indiscernible]. Similarly, we recently won a 2,000 user deployment with ARC Document Solutions. ARC is a global technology company focused on document and information management. With over 180 locations around the world, ARC was looking for a single, reliable global solution to cover their needs. The third key growth driver I referred was our strong partner relationship with indirect channel that includes carriers and parts. Leveraging partners to provide more feasibility that indirect channel contributed approximately 25% of earnings in Q1 up from 29% year ago. With AT&A, BT and TELUS we remain the only pure-play SaaS business communications company with multiple major carriers reselling our solution. In the third quarter we continue to expand this out from our carrier partner. In spite of Q1 being typically a seasonally slow carriers we see a sequential increase in our carrier business. It was a great start to the year. One example of the win with the carrier partner was the 1000 user customer. This customer is a reseller of communications and service across all application. The key to this win was our unique multicenter solution to intense their employee presence. [Indiscernible] a great booking quarter as well as our partners adapt the customer's request to move to the cloud. In fact, several of the business deals came from one party. For example one of the well partners worked without order [indiscernible] to deliver a more than 1000 user wins with the Avaya [ph] company. Avaya [ph] is a world class franchise restaurant operator with over 300 venture. RingCentral is a place of their multiple legacy CDF. Quality of service and attempts to implement were key factors in the win. RingCentral growth of the occasion by signing and deploying over the units within the quarter. In addition Avaya channel partner closed a 600 set deal at the Avaya [ph] a multinational company spread around the world. Into the holding company where franchises such as [indiscernible]. The Avaya [ph] group is utilizing Global Office to software need aboard in the UK and Germany. On the technology front we continue to innovate at a rapid pace. RingCentral has the first mover advantage as a dual play cloud solution to capture the size and sifts in communications and in collaboration to the cloud. [Indiscernible] has remained solidly the largest and fastest growing provider in the space. We have consistently invested for 15% of revenue both into R&D to maintain and accelerate R&D. We believe a focus on rapid innovation has been and will continue to be a significant differentiator to develop growth. The cycle is measured in weeks, not months or years. We are well ahead of the competition in terms of investment, innovation, possible integration and product portfolio. We are able to do this because the combined go-to-market up and core technology are all under one role. It drives faster deployment and deployment cycle and spend for better customer satisfaction overall. This is a big advantage even relative to the needs of the customer when compared to legacy on-premise capital solutions. To that end we're making good progress in our quest to tightly integrate diversification and collaboration in the cloud. We recently unveiled a new capability that enables you to specifically transition from a Glip messaging to a voice with a simple click of a button. This is [indiscernible] to integration of the enterprise cloud visibility with an initiative evaluation tool. This will create a more streamline and convenient experience for all our users. For the 2,000 user ARC Document Solutions I mentioned earlier all Glip enterprise messaging an collaboration capability were a key differentiator in winning the deal. With a slight refund in Q1 we also continued to open platform with closer integration. Last quarter, we achieved a significant milestone of over $1 million sales price API requests per day through the platform, up 20% sequentially. Additionally, we saw more than 50 stores for integration in the quarter, raising the total to over 175. This integration provides the definitive benefit for our customer while creating further growth for RingCentral. In Q1 one example of which was driven by RingCentral Connect platform visibility 1.8 400 user customer as one of the major largest major electric company. The seamless integration with Google was critical for this business. Integration is a new vertical are also part of our enterprise drill strategy to create an abundant solution for our customer. However power integration with [indiscernible] is a self-started vertical. Now the patients automatically enables medical officer workers to see this a 60 degrees view of a patient's medical and insurance profile. We're now working on a similar integration of the insurance industry. At Medical [indiscernible] detained a customer of potential of last year with over 1000 user. Expanding this customer relationship with an integrated partnership is in our ecosystem expansion strategy. This gives us a vertical integration for yet another differentiator for extensive office to extend our margin. Our clause comp extensor offering seems to unlock meaningful new facilities for restructure. In Q1 we want profit sensor users at the holding. It is one of the largest independent honor of absolute authority to disseminate. Our ability to provide one solution for communications series was key to this win. Our extended product portfolio with the recent cloud comp extensive offering is also increasing our extent. These are all the growth of multi channels in beverages. We could not provide to the customer. This has allowed us to close out of the install base and to the extend our deployment in other areas. However that market is playing out as we set multiple vendors of growth alongside this huge opportunity created by business communications suggestive of the cloud puts us in a great position. We are well ahead of communications in terms of investments in innovation, partnerships and integration. The cloud communication market traditionally is early stages. We are still in very earnings inning with the long run rate attached. We could more than double the size of the company in the last few years and still be well under 10% share of the overall market. These are early innings indeed as the best is yet to come. And with that, I'll now turn the call over to Clyde.

Thank you, Vlad, and good afternoon, everyone. Before I begin, I want to ask that you refer to the slide deck on our Investor Relations website, which will help summarize the key points in our call today, as well as provide some supplemental information. Q1 was a great start to the year highlighted by another quarter of over 30% subscription revenue growth, record software subscription gross margins of 80% and a third consecutive quarter of positive non-GAAP operating margin. Relative to our guidance, we once again met or exceeded the high end of our outlook for revenue, growth in operating margin, and EPS. Total annualized exit monthly recurring subscriptions or ARR grew to approximately $340 million, up 34% year-over-year and 7% sequentially. The ARR for RingCentral Office grew to approximately $269 million, up 45% year-over-year and 9% sequentially. Customer satisfaction continued to be strong in Q1, with overall net monthly subscription dollar retention over 99%. Office net monthly subscription dollar retention was once again over 100% as it is common for customers to adopt RingCentral office in part of the organization and increase their footprint over time. Our software subscription revenue was $80 million up 33% year-over-year and 5% sequentially. This was driven by a strong performance in office especially up market along with a very strong quarter in our indirect channel. Total revenue for the first quarter was $86.5 million. This was above our guidance of $39.5 million to $82.5 million. Compared to the midpoint of guidance this was an over achievement of $5.5 million. I would note that this $5.5 million over achievement includes about $2.6 million as a result of the transitions to the new agency model for our phone fulfillment as we were conservative in our initial forecast given this was the first quarter of implementation for the new model. As a reminder, in the first quarter of 2016 we began to transition direct phone sales to an agency model where phones are sold to our customers by a third party distributor. Under the new agency model RingCentral received the commission for phone sales instead of recognizing the full sale price. In order to provide transparency to investors we have provided supplemental information on a pro forma basis to provide a clear comparison of the company's result with prior periods under the new agency model. The pro forma information reflects the result as if the company had fully transitioned to the new agency model for the first quarter of 2016 and for all periods in 2015. This supplemental information is provided in today's press release and on our IR website. Adjusting for the new agency model on a comparable basis by removing the $2.6 million additional revenue from the transition I mentioned earlier pro forma total revenue was $83.9 million and grew 34% year-over-year. This was up from $62.7 million in the first quarter of 2015. There is no change to software subscription revenues under this model. Before I move further down the income statement I want to remind you that my commentary will be focused on pro forma results and guidance. A reconciliation of all GAAP to pro forma results is provided with our earnings press release issued earlier today and in the slide deck on our IR website. Our software subscription gross margin was a record 80% in Q1. This represents a 590 basis points improvement year-over-year on a 140 basis points improvement sequentially. Our continued margin expansion further demonstrates the leverage from our multi-tenant SaaS model. This 80% gross margin achievement places us amongst the best-in-class SaaS. Pro forma gross margin from our other revenue line was 39% in the quarter. Other revenue includes commission under the agency model, professional services, and revenues from phone rental. Pro forma total gross margin was 78%. Sales and marketing expenses were about $40 million for the quarter or 47% of revenues. This was up from 46% last quarter and down from 48% in the first quarter a year ago as we continued to invest in growth given our model attractive unit economics. As Vlad noted we have seen mid-market sales and marketer's ROI's surpass those of the small business sector. You may recall that we discussed investing into the midmarket ahead of the curve and we are started to see that pay off. These efficiencies give us the capability to further invest in the mid-market and enterprise market segment, which should result in higher quality and stickier revenue to the company. As a testament to our business model combined with the efficiencies I mentioned above, we continued to see attractive unit economics with each dollar invested in sales and marketing contributed $8 of revenue and $5 of contribution margin over the projected life of an office consumer. R&D expenses were $13 million in the first quarter or 16% of revenues, down from about 17% last quarter and Q1 a year ago. G&A expenses were about $12 million in Q1 or 14% of revenues, up a point from 13% last quarter and down from 15% we reported in the first quarter of 2015. We had an operating profit of about $1.3 million, from an operating margin of 1.5%, which is above our guidance of breakeven to 0.5%. This is an improvement of nine points from the first quarter a year ago and about 0.5 point from last quarter. Net income improved to $1 million compared to a net loss of $5.3 million in Q1 of last year and $0.5 million profit last quarter. Net income per share was $0.01, at the high end of our Q1 guidance range of breakeven plus or minus $0.01 per share. Share count was 75 million fully diluted shares. On a GAAP basis, our Q1 net loss was $6.6 million, or a loss of $0.09 per share. The difference between our GAAP and pro forma results includes $7.6 million or $0.10 per share. Of that amount $0.09 per share was in stock-based compensation from the combination of amortization of intangibles and other items related to the Glip acquisition and from currency measurement of our balance sheet all of which we excluded from our pro forma results. We ended Q1 with cash and short term investment of $159 million compared to $138 million at the end of Q4. Deferred revenue was $39million as of December 31, an increase of 6 sequentially and 38year-over-year. Deferred revenue grew faster than revenue year-over-year, due primarily to the addition of larger customers who are more receptive to annual invoices 0. For the quarter, cash flow from operations was positive $4.8 million, compared to negative $72,000 in Q4 of last year and positive $2.9 million in last quarter. This is the fourth consecutive quarter of positive operated cash flow result. Moving to our outlook for the second quarter and full year 2016. We have historically provided guidance to total revenue. Today we will also be providing guidance to subscription revenue for additional clarity. For the second quarter we expect software subscription revenues of $83 million to $84 million or growth of about 29% to 30% year-over-year. We expect total revenue of $86.5 million to $88.5 million which are the pro forma basis would imply year-over-year of 27% to 30%. We expect non-GAAP operated margin of 1% to 2%. This should lead to a non-GAAP earnings per share of breakeven to two penny based on 76 million weighted average fully diluted share. For the full year 2016 we are raising our software subscription revenue guidance to $344 million to $350 million or growth of 27% to 29% and up from our previous guidance of $337 million to $345 million. We are raising our total revenue guidance to $359 million to $367 million up from our previous guidance of $247 million to $357 million. On a pro forma basis this would imply a year-over-year growth of 26% to 29%. We are also within our outlook for pro forma operating margin to a range of 1% to 2% up from 1% to 1.5% we provided last quarter. This should lead to pro forma earnings per share of $0.03 to $0.07 up from $0.01 to $0.05 previously. We expect weighted average fully diluted shares to be $77 million. In summary we started 2016 with great momentum across multiple growth factors which bodes well for our future success throughout the year. We are going after a huge under penetrated market opportunity. We believe our first mover advantage in investment and innovation, channel partners, and expanding our adjustable market will continue to differentiate RingCentral as the industry leader. With that, I'll turn the call over to the operator for Q&A.

Thank you. [Operator Instructions]. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Bhavan Suri with William Blair. Please proceed with your question and please limit yourself to one question and one follow-up question in an order of time, so we can get to everybody's questions. Thank you.

Hey, Vlad and Clyde, can you hear me okay.

Yeah, Bhavan.

Yeah, just fine, hi, Bhavan.

Hey, Vlad congrats on a great quarter you guys. A nice set of numbers there and nice guidance. Vlad despite you're obviously being a little unwell I hope you feel better. Just a dive into questions. The bigger question I think that investors are wrestling with is around your relationship with AT&T and sort of the concerns of the rollout sort of a what could be viewed as a potential competitive offering. We would love just to get an update on how the relationship is progressing? And sort of how you view what might play out there over time, and I have a follow after that? Thank you.

Sure, Bhavan, so yeah, Vlad I'll take this one. Okay so firstly, yes I'm a little bit disappointed with the weather. Unfortunately also [indiscernible] and it had a very full day of meetings yet, but is for good cause, but I think I'll be fine. Look as far as the AT&T I think it is same answer, it would be fine. AT&T has been a long-term value jumbo partner of ours. We have co-existed with other service providers and other vendors within the AT&T ecosystem. We've completed within and survived within the environment very effectively. To be clear our relationship with AT&T actually coincides that of most of the other service providers in this area and there continued to be still big with reasons to continue thinking that this is a healthy relationship. We're still in a need in their portfolio. Their own pronouncement lately have indicated that the fact that they will continue offering the best solution for use case. So we're pretty optimistic as this relationship will continue and will continue keep growing.

Great, that's really helpful. And then one quick follow up if I may, you talked about sort of the value again moving up market. We've obviously seen that in terms of the deferred the billing. Just a quick question on investment do you think it’s going to need, you know you shipped the sales force and you added sort of a mid-market enterprise sale force do you need to continue increase estimate as you move up mid-market or do you think that at least for this year you got those investments build into you guidance and numbers to continue allowing penetrating up market?

Yes. So, let me take the first bit. So first related to DataClear yes, that we're a growing company and you can see our growth it speaks for itself. Of course, we're planning to continue our interment, but every investment that we're planning to do is of course built into the guidance. So, no of course, we will not be projecting a negative trend and as you know, this has not been our history from day one with [indiscernible] a further conservative [indiscernible]. Now, with respect to mid-market in particular, it's actually a very interesting point and I just resorted in my prepared comments, but I want to reiterate. It is really a momentous occasion for us that now our midmarket ROI is actually better than that of what we get with molded. So what this really means and this used to be not be the case because it was a more than double for us, so as we were scaling up since we're not as efficient. But we are now finally in a situation to where it is actually, on ROI basis made better business sense for us to invest midmarket than even in the smaller businesses where we started stronger a number of years ago. So yes, we'll continue this investment, very focused given this revenue. We are extremely optimistic and we actually have a very solid base at [indiscernible] at this point that this success should also transfer over into enterprise account and would define mid-market as absolute and enterprise as [indiscernible]. So we will continue the investment, continue growth and we are confident to continue the growth in ROI. And Clyde anything you want to this.

No, Vlad, I think you covered it. The key is in mid-market just to reiterate the efficiency that we see in which makes it a lot more easy and more efficient to grow revenues in that mid-market, so I think you did a great job.

Our next question comes from the line of Terry Tillman with Raymond James. Please proceed with your question.

Hi, gentlemen. Can you hear me okay?

Yes.

Okay. Hi [indiscernible] I like [indiscernible] first off, great numbers. The first question is the broader competitive question in terms of the classic characters you see in the SMB market or the small business market, mid-market enterprise are you seeing any changes in terms of who you're seeing. And could you remind us until one comment Vlad on how or why we win across those segments?

Sure, so let me take you through that so why do we win. We win because we still have a better product, better usable product. We continue meaningfully out basic over our competition investment in R&D. We own our own platform. We are not a reseller of any [indiscernible] as some of our competitors are. And very importantly we invest very heavily into user experience both vis-à-vis the product itself, but also in the entire provisioning on board and life cycle management. So frankly you get what you pay for and we're very, very heard about valuating the 0best possible product in this category. And I think as always we have third-party validation. In that the absolute magic quadrant leader will get an opportunity this year. So this is far as why we win. And by the way we continue this investment and yes they are also baked into the guidance. And we believe that we are well poised to continue this record of outperformance and excellent technology.

Look as far as the competitors that we see we see larger companies Cisco and Microsoft waiting their chance and saying they also want to be in cloud communication UK segment. And that just means that there is finally broad market acceptance and from that should make that job easier. We no longer need to condemn the government that Cloud is a viable solution for communication for business to obtaining guidance. Of course larger companies are also a bit conservative, but frankly what we did and what you hear from Gartner as we seal the deal. We do this to curb a sizable advantage that measures the entire year both Cisco and Microsoft. And while we're talking a good game we play a good game, so we're comfortable with that.

And my follow-up that relates to it's good to see the milestones turn around the upmarket business. Could you remind us? You obviously had the Denver operations and I'm assuming you continue to invest the mass. And how is the seller operating going until we expect regional sale of offices in 2016 or is it going to be more of our prepaying the fence beneath those offices? Thank you?

So we probably see more of a deepening debate, but understand the location that you've mentioned which is Denver and Charlotte. In the course don't forget they are ex-workers in Vermont, it's in Gabelli. This is our major centers, but we do have people throughout and we are effectively covering the entire focus of the United States. Having said this, look Charlotte is our nearest office, but typically well-established playbook. So we know how to onboard people, how to get them to be productive and it's all executive same time as we in the connectively. It's still the same company.

Our next question comes from the line of Nikolay Beliov from Bank of America. Please proceed with your question.

Okay. Thanks for taking my questions and adding my congratulations on the great quarter and the guidance. A quite a hit question for you and just point in the IPO you provided a long-term guidance of subscription but having your gross margins of 75% to 80% you hit 89% in Q1, and you provided long-term gross margin guidance of 70% to 75%, you hit 76% in Q1, which is above the high-end of the long-term guide. You already there, I mean, at this point service tax goes to max to level off or there is more room for improvement here going forward? And how that out performance on the gross margin line might impact your overall EBIT goal of 20% to 25% in the long-term?

Thank you, Nikola. So as a company the team has done a traffic job in executing. We have a terrific team from sales all the way down to operations that got us to 80% on our subscription gross margin couple of years out after the IPO so a big shout-out to all of them and I think it demonstrates the quality of the product and the acceptance of customers. I think it's still a little early we just hit it to look at the extended ranges that might be something for the future. As you know earlier we shifted a model and that shifted a model by direct phone sales is going to help margins that's what you saw on the total gross margin improving, so we will go and implement that and without right now today change in that. As to the bottom line one of things Mike mentioned earlier is a couple of things that we account for you it's still a very large market under penetrated. We are wining very well in that space, but consistent with SaaS model requires a fund investment in product and sales and marketing and we intend to continue to do that while generating 30% plus of revenue growth. So our bottom line is improving. I think this is third consecutive quarter of improvement, obviously not close to our target yet, but the target is much further long and it probably doesn't reflect 30% growth. So for now in summary, we're very comfortable where we are. I think you might see some modest improvement on total gross margin and we will continue to have that in other market and products that continue to drive the top line.

Thank you.

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

Yeah, great. Thanks a lot. So in this year’s first quarter you saw, you had positive AR growth which was about the same as in the prior quarter whereas in the last year you saw a little bit of slowdown in the first quarter. So is it fair to see kind of the indirect channel in the mid-market are keeping the growth rate a little bit more sustainable?

Well we had a good quarter on indirect. I think Vlad mentioned there is a very good, probably a record – it was a record quarter for indirect, particularly it was and we've invested in that area Mike, as you know for quite a while. That combined with the inflection in the mid-market is beginning to yield good returns for us. So not surprises I would caution you guys not to get too hung up about absolute year-over-year. There will still be some volatility in those year-over-year bookings change. But as we still, as the market is still emerging and then we're mixing it to go to latter customers, hopefully you'll start seeing more and more 1,000 plus customers. So I wouldn't get too hung up at any given quarter, but you're right, we had a very good first quarter partly driven by some of the other growth vectors we have in indirect in general and did particular did well for us.

And Vlad you mentioned Cisco and Microsoft racing ahead. I guess clearly you had a very strong first quarter, but I mean just qualitatively are you seeing customers take a little bit longer time here to evaluate those options now or no real changes in sales cycle?

Actually, as mentioned is we see a sales start cycle in the mid-market actually contracted a little bit and that it will truly lead to better our ROI our overall. I think that one of the dynamics that you're seeing is that firstly the customers know you no longer need to be convinced of the fact that cloud is the solution of choice. So definitely we see a different point there. We just mentioned that we now have several customers with $1 million commitment on our books that would not be the case up [indiscernible]. And what we see is customers now saying okay, well you know what we are going to do with cloud anyway. Who is the business leader? Who is the segment leader? And I don't know whatever due diligence they do, but the fact remains. Neither Cisco nor Microsoft today have a true cloud offering that would elicit growth to what we have shortcoming in Cisco's offering is really stung together and Microsoft seems to be a couple of years behind of features. So it has been helpful for us for this giant to acknowledge that cloud is the way to go.

Our next question comes from the line of John Difucci with Jeffries. Please proceed with your question.

Thank you. Thanks for taking my question. Vlad and Clyde I would somewhat come back to your question you asked. And listen your results and your guide sort of speak for themselves. You obviously see a lot of traction in the market. And all the data and the [indiscernible] we points to the secular move that you're talking about in those businesses in the cloud based solutions in this market. But With AT&T and we talked to investors about this all the time in [indiscernible] and I'm sure you should have probably talked about this the last month. It is about a month ago, so that it was now the material part of your revenue and that's why there is such a focus here. And I just, it took me, that has not been that long ago this was announced, but have you seen any change in your business coming in through AT&T? And you had enough time now to speak, talk AT&T about it. How do you think this is going to move going forward. I realize you have a lot of other partnerships through and they can make up four times especially if there a second move. But just to get a better feel for us and as we think about this going forward, how do you think – have you seen any changes in that relationship as far as the business coming from it and do you anticipate that happening going forward?

Yes, hi, Clyde again. So look short answer is no. We continue getting very strong performance and monthly amount of numbers, the pigment itself. As I mentioned we're very optimistic that the strength of our product would continue carrying the date. And of course, it's good that AT&T with 11% of our revenues. And we have mainly other channels and they've large user base of our own, but we're by no means should we get the doubt on AT&T. And as a matter of fact, as far as what we see on the ground today is on the track. And really what I really urge you and my overall concern for this is that resort to their own announcement of some of their new products which were very excellent in the position that they think that they will continue dealing and offering multiple platform. And what we can offer is a level playing field. We know that our product technology and go-to-market will carry the basis there.

That's great, Vlad. Thank you very much. It's very clear. And if I could, my follow-up probably a question for Clyde. It's nice to see the run-rate profitability Clyde. It's also nice to see that you guys are doing what you're saying you're going to do consistently here in this regard. In this case still, I don't think it was mentioned, but your free cash flow positive in this quarter two, so it's really nice to see. But assuming this growth opportunity continues here and it almost feels like now, especially given some of what we're seeing out there in some of what you talked about and Vlad about in the prepared remarks that the woods are ready now. Does it make sense for you to potentially increase your investment in your go-to-market efforts at this point? Obviously that could have an effect on margins, it doesn't – but if you're growing you could still profit. And how do you think about that given the opportunity today?

Yeah John, thanks you very much. The company has done and the team has done a great job. The – you mentioned free cash flow positive. We were last quarter minimally well over $2 million bucks, but let me add to that. As we are going to invest that's clearly within the management team to keep investing, so we'll continue that. We agree with all of the points that the market is ready, the market inflexion point you could use that for several quarters, that's there. The adoption rate is increasing, so why not increase investments. We'll do it in a very intelligent way as we have in the past, but we will increase our investment in that space. So just speaking back about cash flows to make that point we really didn't highlight this as much next quarter. More likely than that you'll see us making some CapEx investment to expand our footprint globally, to increase our presence in some other countries we don't participate, in the geographies we don't participate today. And so that's one quarter that, so you might see a negative, but I think consistent free cash flow basis is in our near-to-medium term future. So the point is that as continue to invest both in sales and marketing and product and in CapEx, to take advantage of the inflexion point that we have. So while top line would grow, continue to grow, and grow healthy, the inherent SaaS model where you've got to invest upfront for sales and marketing and you get your return over a period of time will tamper down the rate and pace of increase of your margin improvement, but you will see that increase. Now that basis our guidance, so guidance is a full guidance with revenue and profit. So there is no additional risk involved in there, but the short answer is we are going to build on the success we had. We're going to keep investing. We're going to keep investing as we have in the past intelligently and delivering results to you the investment community as we have in the past.

[Indiscernible] John is everything, every investment, we will continue to invest in aggressively, but to the best of our knowledge and ability, every land investment have been [indiscernible] basis.

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

Hi, this is Jack again I'm filling in for Bellini. Just a couple of question. One, on the international expansion so it looks Global Office, the Global Office product is being rolled out and it's like more than 20 countries I assume versus just ability in 10 today. I guess, what are the hurdle involved there, I know you talked about the CapEx investment so is there any other sort of, I guess any other barriers on that? Secondly, what do you assume with that uptick for that product so far?

Okay yes, hi. So, couple of things so firstly, as we're rolling out Global Office is today already available well over 10, but it's actually most of macro account, because there are much larger accounts, you know and much stronger one. We cover some of the major ones already. Of course, Europe, UK, Germany, France some of the larger economy in the western hemisphere already covered and just deliver where we get demand.

As far as CapEx is concerned I also wanted to be very carefully here. We have the infrastructure in place already open up for to cover both North America as well as both Western Europe, okay. So it really is more of a matter of rolling out a product across those geographies which have a lot to do with abide barrier local regulation legal requirement domestic to get the appropriate licenses to operate. Frankly, none of this is rocket science, but it just takes time and procedure and we're very, very comfortable with our international expansion roadmap. And again, just to reduce you know numbers itself three months over a 100 global enterprises, using RingCentral global accomplishment again most account.

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

Hi, guys this is Daniel Greenfield dialing in for Brian, congrats on the quarter, just one question from me surrounding the contact center actually how did the contact center and I understand it's relatively new, how that help you grow this quarter and are beginning to actually comment any deals were you actually start with the contact center or are you participating in a lot of RFPs where the customers asking for both contact center and PBX replacement? Thanks.

Yes we, look we should never position our growth contact center and a standalone solution, even though if we do just fine at that level but really the value is very close integration. It went UK and grow at contact center and that's where we sell. So the way that we look at it is selling this product does really two things. So firstly it's on luck new opportunities for us where customers essentially they want to have a single vendor, single bill and you know single sort of a joke and we are now heading both under one roof satisfied. And the second of course is contact center pricing is generally higher than that for UK is and that does have a positive effect on our part okay as well as you know [indiscernible]. So it's a very important, [indiscernible].

Great, thanks.

Our next question comes from the line of Sterling Auty from J.P. Morgan. Please proceed with your question.

Yeah, thanks, hi, guys. Just one question. In your prepared remarks you gave a lot of examples of technology customers. Just wondering if in the new customers you brought on the quarter, was there industry concentration for technology or any other one or two industries?

Yes, sure go ahead.

So the short answer is technology we had some very good successes primarily because they are early adopters, but we have many examples of successes outside of the tech industry. Early we announced, we had an announcement early this quarter with an engineering company obviously not in the tech space that deployed a very large deployment as an example. There are more examples out there our press release of this. We have retail a number of phones restaurants, pizza hut for example a franchise deployed out of the East Coast. So the deployment is not industry specific, it's very broad as you would expect it to be. Maybe there is a flight as the technology company that may be earlier adopted, but that's di minimus. I think this has been adopted of course all industries.

Thank you.

Our next question comes from the line of Jonathan Kees from Summit Research. Please proceed with your question.

Great. Thanks for taking my question and I will add congrats for the quarter. Just wanted to talk about your indirect revenues. Obviously there is a lot of questions in terms of AT&T. Just wondering, if you can provide some more elaboration in terms of other two carriers? AT&T being obviously 10% customer and being a good part of that indirect revenues, but your expectations of at least with BT is not with TELUS to become in the near future some of course being a 10% customer. Certainly you have mentioned in the past that the growth rate has been better than the AT&T has they performed in the past? Just some additional color on that and I also have additional question, follow question. Thanks.

Sure. Let me take that. So of course, we would like you know every such really expect to become 10% customer, but I want to caution that it took AT&T over five years to get there and AT&T is a larger company that it doesn't represent the BT product mix. So, it's a matter of time and really want to since you paint everyone, we're a pure-play cloud service provider. And what that means is that while growth can be fairly rapid, but we can get trained buy the seats, buy them up. So, it takes some time to build, to really meaningful revenue base, but the good news is that once you do it should keep your churn under control and our churn as you know, our Netsure continues to be in that – we continue to seek more revenue from customer cohort year-over-year. So as long as that track continues we will, you know we feel very good about double strategy and exit those channels, but really it's going to be some time. It also, of course don't forget that we were investing quite heavily on indirect side as well and we never want to move that because with that that put us in control of our destiny. It allows us you know really the most secure way of controlling delighting our customers. And so keep your horse riding. You know but hopefully we will continue growing very strongly across all our channels. And also as I had mentioned not just direct and carrier or service provider but also some additional parts which have been doing very, very well for us.

Okay, great. And if I can ask by those horse it’s still far on the indirect area, I guess ex carriers that's a smaller part of the indirect revenues, you recently added a new chief for that division and looking to expand your partnerships there and master agents I guess I wanted to see what if you can elaborate more in terms of what you're looking to do there. There are lot of companies out there that added and increased parts and it's still not gotten the traction that they had hoped for. I guess I wondered what you're doing hopefully what you're doing differently?

Well, so you know as I just mentioned, well we haven't yet broken our general numbers publicly. But just to reiterate we are seeing very good performance from the general. As you know we're seeing healthy growth in our overall business. We're seeing very healthy growth in the metro site reported for retention orders and that is approximately what $270 million they went to $280 million business, so things are well. Having said that, well are doing even better than in terms of average. As far as well other companies are investing in this general about the market general I think the result look I can only keep ourselves with them to balance our investment in the product and technology with our investment in the general. And we strongly believe that even above and potential we see people do is over invest is the a general as it central to product and product needs to carry it off to. So we think that as long as we continue believing the categories and technologies and as long as we continue our focus and our investment and hire the best people out there that we can find and we can find very good people given our performance lately we should be fine. Again, we're very, very excited about our indirect channel and within that specific reward.

Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Hi, this is Eugene Anderson [ph] on for James. Thanks for taking my question. Just a little bit more on the gross margin outperformance. Asides from the change to the phone model, are there any other drivers that you could perhaps shed some more color on, perhaps you're seeing better pricing or may be a lower transport cost? Thank you very much.

If you look at the subscription margin, which is totally independent to the model that also improved almost 2 points quarter-over-quarter and I think 6 points year-over-year. So, that's the true value of our software subscription of having a multi-tenant model you're seeing leverage in there, but as we get bigger we get better economies of scale, particularly like on transport cost for example. So there is a fair amount of on the cost side. On the other side the cost as we've described in previous calls, our churn has been improving, last time we reported about 20% year-over-year each of the last two years, that also helps. And then as we move up to larger customers you're getting a lot more that contributes to the same thing that achieving long-term a lot more stickiness underline. So all of those contributed what eventually was last quarter 80% subscription margin on subscription. So it is just a business model, the fundamental software is generating a significant amount of gross margin.

Thanks so much.

Thank you.

Our next question comes from the line of Kash Rangan from BOA Merrill Lynch. Please proceed with your question.

Hey guys, can you hear me okay.

Yeah.

Yes, you're fine.

Okay, wonderful. Thanks so much. Some had to hit me over the head to remind that you actually you guys have seven figure. So talk a little bit more about the seven figure deals, what is – my rough math suggests that's about 3,000 users for at least per seven figure customer how do we get to this point and how were you able to convince these customers that you are for real in the enterprise business to role I mean are we potentially looking at a good chunk of the Fortune 500 equity 500 using RingCentral over the next few years because I think this is an important landmark. And secondly I know that we all like to study Microsoft and we wouldn't like to dismiss Microsoft they have this package in E5 which includes the Skype functionality coupled with office all delivered as a cloud-based service previously you had to install a server and I know that several of your management team members had been at other companies that compete with Microsoft. How are you viewing Microsoft and how I understand that your technology is two years ahead of Microsoft but let's say we were two years down the line. What is RingCentral going to look like that can give us a confidence that you have a game plan to continue to stay abreast of Microsoft maybe you have to find a new market segment or is there something else going on in your mind just want to get your thoughts? Thank you.

Yes thank you Kash obviously we're trying to give more that we have as far as seven figure deals so yes its very, very exciting and look if really another testament to the fact of UCAF except being at the setting points across the board and in particular with larger customers with multiple users that they need to satisfy. So with this is on record I believe it is our IPO and every color we had thank that we don't see a glass ceiling out there. And on the road show Kash as you may remember we were getting equations like, well are you guys going to we will get a 500 seat customer or a 1,000 seat customer which is just question anymore. And I'm asking this that we will eventually be announcing a 10,000 seat customer and probably it will be beyond that. And I just want to reiterate one more point that even though for in this quarter for some time with the social about our growth, growth up market customers as seen over difficulties but in reality the average account for those customers is well over 100. So we are absolutely wealthy too debt market. And as you stay by double-digit indicator this seven figure deal we are now containing service stages of penetrating to enterprise down to the employees. And penetrate a lot of the success is again in our absolute commitment to technology innovation and application of excellence and in particular the fact that our global audit we will people have been already in fact that are global audit product is just short three months and over accounted more multinational usage is this will go to show just how much had to size there is out there again the numbers the new numbers that our overall market penetration not just us but for the entire new customer would be centered in single digit though established legacy for it and writing is on the wall. You can't grow, it will take over, we are leading in the segment and we expect to continue this leadership. We exactly do the second phase integration, okay so what about Microsoft? Of course notably whatever do this quarter, a very strong company with a very strong channel but over and over people are well focused, well-funded and I really aim at interesting on a particular strategy in a particular field, over and over those people have been able to set up. And as you know we got quite a few goals from CapEx that did extremely well when Microsoft bought a direct competitor of the of course you other example, you have people like [indiscernible] you know or about 60% of that market is basically supporting Microsoft about the field and look it's a very large market. So, we usually don't see anybody monopolizing it even Microsoft and there is a quite a roadmap that we have a better part and we know to execute. We believe we will be able to give up and continue delivering better value, better functionality, better customer service and continually get paid you know the old fashion way.

There are no further questions in the queue at this time. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.