RingCentral, Inc. (RNG) Q1 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the RingCentral's First Quarter 2017 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. It is now my pleasure to introduce your host, Clyde Hosein, Chief Financial Officer for RingCentral. Thank you, Mr. Hosein. You may begin.

Thank you. Good afternoon and welcome to RingCentral's first quarter 2017 earnings conference call. Joining me on the call today are Vlad Shmunis, Founder, Chairman and CEO; David Sipes, Chief Operating Officer; and Mitesh Dhruv, Senior Vice President, Finance and Strategy. Our format today will include prepared remarks by Vlad, David, and Mitesh, followed by Q&A. The purpose of our call today is to provide you with information on our first quarter performance as well as to provide our financial outlook for the second quarter and full year 2017. Some of our discussions and responses to your questions may contain forward-looking statements. These will include statements on our expected financial results for the second quarter and full year of 2017 and our expected annual revenues several years out. In addition, these will include our future plans, prospects and opportunities, trends in the business communication market, our expectations regarding our continuing success in the mid-market and enterprise segments, and our increasing momentum with our channel partners. We'll also be making forward-looking statements about our competitive position, the expected benefits of our investments in technology, our open platform and integrations, our products, including contact center and our collaboration communication solution Glip and our Global Office and RingCentral Europe Solutions, our growth strategies, current and future market position, and expected growth. These statements are subject to risk 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 effect of competition and technological change, the success of our marketing, sales and retention efforts, and customer demand for an acceptance of our products and rev services. A discussion of the risk and uncertainties related to our business is contained in our filings with our Securities and Exchange Commission and is incorporated by reference in 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 release and slide presentation, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail on our Investor Relations website. For your convenience, copies of our script are available on our website. Before I turn the call over to Vlad, I wanted to let of a transition we announced today. We announce that I will be transitioning to the CFO role to Mitesh Dhruv, effective on the signing of the next 10-Q. I will remain with the company until end of May and provide support to the RingCentral team. I have been with RingCentral for about four years, joining just before the IPO. It has been a tremendous experience. We have grown revenue from about $120 million to over $400 million, have substantially increased the size of customers we address and are now winning multiple enterprise customers. We are profitable, have now generated five consecutive quarters of free cash flow and have a strong balance sheet with no debt. I have accomplished all the things I wanted to when I joined four years ago, including the successful RingCentral IPO and presence of the public company. Mitesh has been at RingCentral even before me, and we have worked together for the last four years. During this time, I have given him increasing responsibilities to manage all the finance functions, including FD&A, controllership, tax, treasury, and more recently, an increased role in Investor Relations. With this succession planning, he is ready to assume the CFO role with a seamless transition. This transition fits really well with my personal plans. I plan to spend time with my family and I will continue to be a big supporter of RingCentral. With that, I will turn the call over to Vlad, followed by Dave Sipes and Mitesh. I will be available during the Q&A portion of this call. With that, let me turn the call over to Vlad.

Thank you, Clyde. Before I give an update on Q1, I want to acknowledge Clyde for all his contributions. Clyde played an important role in our journey from IPO to over $400 million in revenues. And I want to thank Clyde for the excellent job he did in transition planning and developing our next generation finance leadership. Now, on to Q1. Q1 was a great start to the year. Our software subscription revenue growth accelerated to 30%, up from 28% last quarter. Total revenue grew to $112 million, up 29% year-over-year. Our results were driven by our success in all segments and especially in the mid-market and enterprise as well as increasing momentum with our channel partners. Legacy, on-premise, vendors' businesses in our industry are mostly shrinking. Cloud is winning and we're winning in the cloud. We're the largest, fastest-growing pure-play cloud provider for business communication solutions. Last quarter, we believe our win rate further increased in the mid-market and enterprise. Our channel business continues to accelerate as enterprises are increasing their adoption of cloud communications solutions. With these tailwinds, we believe we are further widening the separation between us and our cloud competitors. For a little more color, I like to talk about the following three areas. One, overall industry perspective; two, summary of our Q1 performance; and three, our continual rapid pace of innovation. We recently participated in Enterprise Connect, the leading trade conference in our industry. It was remarkable how clear it was that the future is cloud. Three years ago, at Enterprise Connect, cloud was just a discussion topic. Even as recently as last year, cloud was still not the clear winner. However, this year, cloud was front and center and the move to the cloud seemed to be a foregone conclusion. Even the legacy vendors have recognized that cloud is winning. The legacy PBX vendors are mostly no longer promoting their purely on-premise offerings. Instead, they're trying to push a hybrid or hosted systems approach. But, these are still at their core, expensive legacy solutions, which continued to suffer from lack of innovation, closed architectures, and poor on-boarding and user experience. Larger enterprises are increasingly looking to the cloud to better serve their global workforces, integrate their communication stacks with other lines of business applications and consolidate multiple display systems and vendors into a single solution. Legacy or legacy-based hosted systems simply cannot effectively meet these challenges. We are seeing channel partners rapidly getting more comfortable leading with our UCaaS solutions. The strong demand from our channel partners is particularly coming from those who in the past used to lead with legacy solutions such as Avaya. To better satisfy demand generated by the channel, we have recently introduced RingCentral Europe. This new offering now enables us and our channel partners to serve needs of businesses headquartered in 13 European countries. These market shifts are reflected in our Q1 results. In Q1, our mid-market and enterprise segment grew 86% year-over-year and is now an over $150 million recurring revenue business. Our enterprise sales team had another record quarter. I am happy to say that in Q1, usually a seasonally slow quarter for large deals; we closed six deals with TCV north of $1 million, up from five in Q4. One of these wins was at Hyatt Hotels Corporation. Hyatt will be replacing legacy Avaya system at their headquarters with RingCentral Office. Dave will later provide you more color on Hyatt and some other key wins. In Q1, new business from channel partners showed impressive growth of over 100% year-over-year and over 20% quarter-over-quarter. A number of our large enterprise deals came through our channel partnerships. Moving forward, we expect to continue expanding our momentum by extending our clear technology and product competitive leadership. We continue to make product enhancements to address the increasing needs of mid-market and enterprise customers. We also continue to out-invest our nearest cloud competitor by over two times in R&D. Our unique differentiators remain the seamless integration of enterprise communications and team collaboration, open platform, global footprint, and our relentless focus on usability and mobility. With our strong growth, expanding enterprise demand, rapidly evolving partner eco-system and continual innovation leadership, I feel confident that we will achieve our $1 billion revenue goal by the end of 2020. Now, for some additional color, I will pass the call over to our COO, Dave Sipes.

Thank you, Vlad. I want to also thank Clyde for his support and leadership over the years. I wish you all the best. I will now give more color on our Q1 performance. Our strong performance in Q1 illustrated the market inflection we're seeing across all segments and especially, in the midmarket and enterprise. The combination of our industry-leading integrated solution, global and open platform, and a rapidly expanding partner channel continues to distance us from the competition. Our integrated open platform includes enterprise voice, video, contact center, team messaging, collaboration, and conferencing. With these capabilities, our cloud solution is not just a replacement for legacy voice-only PBX systems. In many of our deals, we're also displacing a wide range of discrete legacy communication tools. As a matter of fact, in a number of wins, we're replacing multiple products and services such as Avaya and Cisco PBX and contact centers, WebEx web meetings, and Slack team messaging. Our pipeline for mid-market and enterprise customers continues to show strong growth as demonstrated by our six seven-figure deals in the quarter. A key winning differentiator is our integrated collaborative communications capability. Vlad mentioned Hyatt earlier as one of our seven-figure wins. This is a replacement of legacy on-premise Avaya system, initially at Hyatt’s headquarters. Multiple vendors competed for this business, including our closest cloud competitors. Hyatt chose us because our solution seamlessly integrates voice, video, team messaging, and collaboration. In the future, Hyatt plans to standardize its communications solutions across its mobile and distributed workforce. Another example of a seven-figure TCV enterprise win that was driven by our unique collaborative communications capability was an 1,800-user win from a specialty communications provider. This account is going to be deployed globally including in the U.K., Brazil, Germany, and South Africa. Additionally, the customer is also deploying over 200 RingCentral contact center seats. In the process, we're replacing multiple legacy systems that are currently providing discrete voice, video, and collaboration solutions. Another key differentiator enabling us to win larger deals is our open platform. This provides our ISV partners and enterprise customers the ability to easily integrate communications data and services into their applications. This has proven pivotal in several large customer wins including an 1,100-user win at N3, a global sales execution and demand generation firm. For productivity improvements, N3 is utilizing Microsoft Dynamics integration with RingCentral Office to customize their business workflows. In addition to our open platform, N3 chose RingCentral based on our proven global capabilities. The ability to deliver collaborative communication solutions to enterprises globally is a unique advantage of our platform over legacy systems. Another example of a Global Office win this quarter is Ultratech, a leading supplier of semiconductor manufacturing equipment. In addition to its U.S. headquarters, this customer has employees in Brazil, Costa Rica, Ireland, the U.K., and Singapore. As a matter of fact, we now have over 700 enterprises on our Global Office platform, up from around 600 last quarter. Contact Center also continued to be a strong growth vector for us, and now accounts for about 15% of our mid-market and enterprise new business, up from 4% a year ago. RingCentral Contact Center is integrated with RingCentral Office collaborative communications capabilities for a strongly differentiated competitive offering. We continue to see strong and improving acceptance of our solutions by channel partners. This is helping us efficiently grow our enterprise business, as these partners are enabling us to reach more enterprise customers, faster, and with higher win rates. This quarter, five of our six seven-figure deals were won with channel partner involvement. As we continue to ramp up more channel partners, we expect this to continue to be a key driver of scalable growth in mid-market and enterprise. We're also seeing good traction from Google. For example, during the quarter, we won a 650-user deal with a New York based global independent advertising network. This customer chose RingCentral Office based on its tight integration with Google Cloud’s G-Suite. We also added 15 new Google partners in Q1 for a total now of about 40. In summary, Q1 was a fantastic quarter, with continued industry-leading growth. Many investors have asked how our mid-market and enterprise revenues compare if we were to cast it as customers with over $100,000 MRR that some other vendors use. By that measure, our mid-market and enterprise business is now approximately $150 million and grew over 70% year-over-year. It’s no longer a question if enterprises will switch to the cloud; it’s only a question of how quickly. And RingCentral is best positioned to benefit from this trend, given our world class go-to-market, technology platform and accelerating pace of innovation. I will now hand it over to Mitesh. Congratulations Mitesh.

Thanks, Dave. Good afternoon everyone. Before I start, I want thank you Clyde for your mentorship over the years. It’s been a pleasure working for you. I joined RingCentral prior to our IPO and it’s a privilege to step up to the CFO role. We see many years of strong and profitable growth ahead for RingCentral and I look forward to working with all of you over the coming quarters and years. Before I begin with the results, I want to ask that you refer to the slide deck posted on our Investor Relations website, which will help summarize the key points in our call today, as well as provide some supplemental information. Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of GAAP to non-GAAP results was provided with our earnings press release issued earlier today, and in the slide deck posted on our IR website. Q1 was yet another strong quarter for RingCentral. We delivered total revenue ahead of the high end of our guidance range, along with year-over-year improvements in operating margin and earnings per share. Q1 was underscored by 30% software subscription revenue growth and non-GAAP software subscription gross margin of over 81%, amongst the best-in-class SaaS companies. More important, we saw strong momentum in our mid-market and enterprise execution. Our mid-market and enterprise segments are now over a $115 million business, grew 86% and represented around 45% of our new sales for RingCentral Office. Total annualized exit monthly recurring subscriptions, or ARR, grew to approximately $451 million, up 32% year-over-year and up 9% sequentially. ARR for RingCentral Office grew to approximately $373 million, up 39% year-over-year and up 9% sequentially. I should note that the quarter was aided by a number of factors including Avaya’s bankruptcy news, un-forecasted new business from AT&T, albeit, at a diminishing contribution, and better monetization of our customer base. As a result, we expect Q2 ARR to grow more normalized at 6% to 7% sequentially, in line with our last year's growth, although at a much higher level of revenue. The indirect channel contributed 27% of ARR in Q1. As we continue to grow and diversify our indirect channel, an increasing percentage of our indirect channel bookings is coming from our channel partners, which are our non-carrier partners. In fact, channel partners had a record bookings quarter and now represents more than 60% of the total indirect bookings. In Q1, over 40% of our new Office business came from existing customers. Overall, this demonstrates customer satisfaction with the RingCentral platform along with tailwinds from land and expand with larger customers as we consistently expand up market. Office net monthly subscription dollar retention was once again over 100% across the installed base. Software subscription revenue in Q1 was $103.7 million, up 30% year-over-year and up 6% sequentially. Other revenues were $8.1 million bringing total revenue for the first quarter to $111.8 million, up from $86.5 million in Q1 a year ago, representing 29% year-over-year growth. We reverted to the direct sales model for the hardware business which generated a two-point tailwind to our total revenue growth in Q1. This had no impact to our subscription growth rate. Our software subscription gross margin was over 81% during Q1, consistent with last quarter and represents over a point of improvement year-over-year, once again demonstrating the leverage from our multi-tenant SaaS model. Gross margin from other revenues was 13% in the quarter. Other gross margins reflect the change to the direct sales model in our hardware business. On a sustained basis, we expect Gross margin from other revenues to be between 10 and 15%. As a reminder, the other revenues line includes phones, professional services, and revenues from rental phones. Total gross margin was 76.4%, up about 60 basis points year-over-year. On a comparative basis, adjusting for the change to direct hardware sales, total gross margin would have been up 180 basis points year-over-year. Sales and marketing expenses were about $55 million for the quarter or 49% of revenues. This was up from 46% in the first quarter a year ago and flat from 49% last quarter. These expenses include investments we are making in the enterprise segment which remains a significant opportunity for us with meaningfully higher lifetime values. Our long-term unit economics continue to be attractive. For each dollar invested in sales and marketing, we continue to see $9 of revenue and $7 of gross profit over the projected life of an Office customer. For mid-market, we continue to see $12 of revenue and for our enterprise customers; we continue to see $15 of revenue over the projected life. R&D expenses were $15 million for the quarter or 13% of revenues, down from 15% in both Q1 a year ago and from last quarter. G&A expenses were $13 million for the quarter or 12% of revenues, down from 14% in Q1 a year ago and up from 11% last quarter. Our operating profit was $2.2 million resulting in an operating margin of 1.9% versus our guidance range of 1.8% to 2.2%. This is up from 1.5% in Q1 a year ago. Sequentially the operating margin is down 20 basis points from Q4 driven by one point of headwind from seasonal effects such as reset of payroll taxes. Net income improved to $2.1 million, compared to $1 million in Q1 of last year and $2 million last quarter. Earnings per share was $0.03, at the high end of our Q1 guidance range of $0.01 to $0.03. Share count was 80 million fully diluted shares. On a GAAP basis, our Q1 net loss was $7.3 million or a loss of $0.10 per share. The difference between our GAAP and non-GAAP results was $9.4 million or $0.13 per share. This is primarily driven by $0.12 of stock-based compensation, while $0.01 was due to amortization of intangibles and other items related to the Glip acquisition. We ended Q1 with cash and short-term investments of $150 million, compared to $160 million at the end of Q4. The decline in our cash balance reflects a $15 million repayment of our entire debt. Deferred revenue was $49 million, an increase from $45 million in Q4 and $39 million a year ago. For the quarter, cash flow from operations was $9 million compared to $7 million for Q4 and $5 million in the same period a year ago. Free cash flow was $1.9 million in Q1. Free cash flow included a one-time working capital headwind due to a switch to direct hardware sales, which was offset by higher deferred revenue, stronger collections, and other improvements in working capital. Before I move on to the guidance, I would point out that our AT&T new business peaked in Q2 of last year and optically is a tough compare looking ahead to Q2 of this year. We expect the growth rates to normalize in the second half as channel partners increase their contribution to the indirect channel. This is reflected in our full year guidance. Now, for our outlook for the second quarter and full-year 2017. For the second quarter, we expect software subscription revenue of $109 million plus or minus $0.5 million dollars, which represents an annual growth of 27%. We expect total revenue of $117 million to $119 million, which represents an annual growth of 27% to 30%. On a comparative basis adjusted to the direct sales model, growth would have been three points lower. We expect non-GAAP operating margin of 2% to 2.5%. We expect non-GAAP earnings per share of $0.03, plus or minus $0.01, based on 81 million fully diluted shares. The difference between our Q2 GAAP and non-GAAP EPS is expected to be approximately $0.14, including $0.13 of stock-based compensation and $0.01 of amortization of intangibles and other items related to the Glip acquisition. This excludes any effects from currency re-measurement, which is difficult to forecast. For the full year 2017, we are raising our software subscription revenue guidance to $450 million to $456 million, or an annual growth of 26% to 28%, up from our prior guidance of $447 million to $454 million. We are raising our total revenue guidance to $486 million to $494 million, which implies year-over-year growth of 28% to 30%. This is up from our previous guidance of $484 million to $492 million. On a comparative basis, adjusted to the direct sales model, growth would be about three points lower. We expect non-GAAP operating margin of 2.5% to 3%, consistent with the guidance we provided last quarter. We are raising our non-GAAP earnings per share guidance to $0.14 to $0.18, up from $0.13 to $0.17 previously. The difference between our 2017 GAAP and non-GAAP EPS is expected to be approximately $0.55, including $0.53 of stock-based compensation and $0.02 of amortization of intangibles and other items related to the Glip acquisition. This excludes any effects of currency re-measurement, which is difficult to forecast. We expect fully diluted shares to be 81 million. We expect free cash flow for the year of approximately $8 million to $12 million, up from $5 million to $10 million previously. In summary, Q1 was another great quarter that marks a strong start to the year. With that, I'll turn the call over to the operator for Q&A.

Thank you. 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. Please proceed with your question. One moment. Bhavan Suri, please proceed with your question.

Great. Can you hear me okay?

Yes, we can.

Perfect. Nice job guys. Thanks for taking my question. Clyde, good luck and all the best and then Mitesh, congratulations. It'd be good to work with you a little more closely. My first question is really to Vlad or David, you talked about improving win rates, you've talked about various reasons for some of the big deals. When you look at the partners and the larger mid-size and enterprise segments, you've touched on the Google integration, you've touched on Glip, is there some commonality in why you're winning these deals will be the competition? Is it just Glip, is it about a more frequent features that's requested, is it Google, is it sales force integration? Is there something specific there and then I have a quick follow-up?

Yes, Bhavan, Vlad here. Thanks for the congrats. And yes great question. Look it's really the combination of things. It's really hard to say that it's just Glip or just the open platform or just the global footprint. What we see really are enterprise customers really wanting to go for the best-in-class solutions, which fairly should include all of these and also it has to be usable and it has to be easy to onboard and administer. And this is where we excel, this is why made the investments we have both into our product technology and the infrastructure, and it's paying very nice dividends now as you can see.

For Clyde or Mitesh, you guys have sort of brought up that $1 billion run rate number, reiterate that in fact, I think I just want to touch on just what would the margin be when you hit that $1 billion? What should we think currently 2.5% operating margin? What does that look like sort of in that 2020 timeframe when you hit the $1 billion run rate?

Sure Bhavan, I'll take it, it's Mitesh. And thanks for the debut question. It'll be a special question forever. So, it's a good question, right. We get this question a lot from all the top investors. So, it really depends. It depends on the growth rate at that time and how fast we are growing. As you know, Bhavan, there is an inherent trade-off in the SaaS model between our long-term growth and short-term profitability. And we tend to optimize for profitable growth and long-term unit economics. So, given the opportunity we have right now to invest in future profitable growth and attractive unit economics, you saw for every dollar we invest, we get about $9 of lifetime revenue back. We would tend to optimize for growth and show some leverage and basically capture this unbounded market we have ahead of us. And you can -- you saw the recent momentum Vlad and Dave highlighted with the Hyatt win and whatnot. So, I think the preference would be to grow profitably. Now, over time, if these investments stop generating the same ROI we're seeing, we can just dial back the sales and marketing investments because it's really a variable cost, it's a tight dial we have and we deliver higher profitability. With all that said, to give you a guide post at a $1 billion, you can think about a combination or a Rule of 40, which is a combination of our growth plus free cash flow margin to be [Indiscernible] towards 40, which is what the best-in-class companies are doing and you can expect us to either meet or beat the Rule of 40 at a $1 billion.

Our next question comes from the line of John DiFucci with Jefferies. Please proceed with your question

Thank you. First of all, Clyde, it's really has been a pleasure and I assume you're getting the RV all powered up and definitely do not be a stranger and also congrats to Mitesh. My question -- my first question is really for, I think for Dave and Vlad. And there's two interesting things happening here and they've been happening, but this quarter it sort of accentuated. And that's both the strength in mid-market and mostly enterprise and then also partner stream. I'm just curious how related those are. Are partners driving more of your enterprise sales or is that more directed this time?

Yes, this is David. So, the partner strength is really helping in the enterprise and mid-market segments and creating introductions. We have also made significant investments in the enterprise teams, both in growing our enterprise team and the leadership there, as well as getting leaders in every region in country and growing out our professional services. So, there is really a combination between those investments we're making in enterprise as well as the partners that we've made strong relationships with are gaining brand recognition with and are helping bring deals in that segment also. We see both directly sourced and channel source deals growing significantly for us.

Okay. David, so I guess maybe a related question. It sounds like both are sort of happening now. And I guess is, with Avaya and some of the issues with Avaya and you mentioned that a very large deal with -- that was a previous Avaya customer. Is it the timing -- are customers now just larger customers more comfortable consuming Unified Communications as a service. So, the timing of the issues with Avaya, is that just sort of playing to your hand and as you know and [Indiscernible] as you mentioned and we know that you sort of built it, built it not only product but also the go-to-market strategy and is this something -- are we seeing somewhat of an inflection right now? Are we in the midst of that or is this just sort of a gradual thing and this is sort of the first quarter and maybe that's really see a quarter of that kind of benefit. Just trying to gauge that.

Yes, no, no. Good question. There's definitely a mind shift, especially customers that maybe on platform that hasn't been invested in significantly and isn't delivering integrated collaborative communications, that we're able to bring with the very rapid rate of innovation. So, those customers are seeing the market shift. They are requesting to look at cloud solutions. And you see that with people moving off of the Avaya platform, we mentioned Hyatt is one of those. And I think that's something that is happening today and is going to continue to progress.

Okay, great. That's helpful. Thank you.

Our next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.

Thank you. Mitesh, my congratulations and Clyde, best of luck. My first question relates to the collaborative side of the business and with Glip now live and running and we're seeing sort of competitive threats, if you will, or at least competitive entrants from a variety of different places. Can you kind of give us an update in terms of -- or you made this acquisition at a brilliant time well before others had come out with a lot of these products. Where are we now? Are you happy? Is this exactly where you want to be competitively? Are there other things we might see on the collaboration side?

Hi George. Vlad here. So, yes, I'll take this one. So, yes, another very good question. Look, if the question is, are we satisfied with what we have? Of course, not. That would be -- that would mean end of progress and we're not there yet. We do feel that we made this very strategic acquisition at the right time. It did give us a very nice head start in coming out what is ultimately our vision, which is a fully integrated collaborative communications solution. We are coming at it from a different angle from some of the other leaders in the collaborative space. In fact we've cracked the harder problem to solve, which is enterprise grade global voice and text communications. So the PBX replacement in the cloud, as you know, we are the clear leader in that and the gap is only widening. So, this put us in a very interesting and favorable position of now adding the collaborative elements, text messaging, file sharing, task management, calendar. But the end result, we feel we have a fairly nice mold here, which has to do with integration and specifically integration leveraging all of our enterprise communications assets. So, that's just because not been repeated and we don't frankly see anyone on the horizon that's gaining ground on us with [Indiscernible].

Okay, great. With my follow-up, I'd like to get a little deeper on the Avaya side. So, you did mentioned that relatively to the Hyatt takeaway that was Avaya we are aware of others that you also took away. I'm just curious are we at the tip of the iceberg from your perspective? Is this something that a year from now we'll be looking back and saying that drove a material portion of your opportunities? Or can you just put it in a little bit more perspective?

This is David. And we did talk about Hyatt as one example and of course, there are many, many more examples that were experienced of moving people off of that platform. And right now, I think it's still early days in that and there is -- they obviously have historically a significant market share in legacy. And those customers as they migrate to the cloud, I think this is expediting their migration to the cloud and expediting their investigation into that. So, we are seeing some increased activity because of that, but I think the size of the opportunity is so significant, it will play out over a fair timeframe.

Okay, perfect. Thanks guys.

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

Hi, thanks for taking my question and a follow-up. First of all, congrats on the nice performance. Clyde, it's been great working with you and congrats to Mitesh. My question is to Clyde and Mitesh, when you look at sales and marketing and your overall structure -- margin structure, gross margins as a target, R&D as a target, G&A getting into that direction, sales and marketing clearly is the biggest variable here. When should we expect to get to see leverage here? Is it a function of you guys going down enterprise investments at some point? Or you just wanted to get your thoughts on the puts and takes?

Sure. Thanks Nikolay. If you look at the leverage, the question is leverage and sales and marketing. And so the way to look at sales and marketing is again, it's a function of a tradeoff between growth and leverage. And as you know, we are maniacally focused on ROI and investing in every profitable dollar we can, which is what I said in the earlier questions, but let me double-click a little bit on the sales and marketing side. So, if you look at it another way -- if you look at our installed base, we have a very large installed base, which is very, very profitable. If you look at our SMB segment, this segment requires very little overhead. All the R&D investment is actually getting funneled to mid-market and enterprise investments. And if you look at even the sales and marketing itself, there is -- the investments are getting over indexed to the upmarket. So, if you look at the recurring operating profit of the SMB business, its north of 30%. Now, the question becomes, what do you do with the 30%? You can either flow it to the bottom-line and print 30% operating margin or self-direct investments to grab even further share of the market. And what we're trying to do right now is grab an even bigger share of the market and self-directing all those leverage points from SMB into mid-market and enterprise. And I think over time, you will see leverage in the business model from time to come.

That's very helpful. And Mitesh just double click on that. At your Analyst Day in November, you shared a little detail of what you think your business is going to be at $1 billion in revenues. And I think the small, medium enterprise business mix was 35%, 45%, 20%. And you said with same companies like Salesforce, maybe its one-third age. Based on your enterprise traction over the last 18 months and is it building up the Salesforce and the marketing opening up, do you see that maybe that 20% number for the enterprise that's in the mix actually might be a little bit conservative?

Sure. So, early days, as I think George mentioned, it could be tip of the iceberg and we are at the very early innings of a huge long-term opportunity. So, right now, we are seeing incremental proof points in the enterprise, which give us more confidence versus our Analyst Day. So, could that 20% be a third? Absolutely, it could be. So, I feel that it's a journey and you'll keep on seeing us deliver more and more proof points in this enterprise segment going forward.

Got it. Thank you.

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

Hey, good afternoon gentlemen. Can you hear me okay?

Yes, we can.

Well, it's big news on a variety of fronts. Congrats Mitesh and I'm going to miss you Clyde. Hi Vlad, hi David. Hopefully I haven’t missed anybody there. On the cash flow, it's actually nice to see nice progress there on slide 18 and it looks like you've increased the ranges or I guess the midpoint would move higher based on updated guidance on both OCF and free cash flow. I jumped on this call a little late, so maybe you already touched on this, but I'm just curious, what would be the delta? What's driving the improved cash flow expectations?

Sure, Terry, I'll take that. It is a combination of things, wherein if you look at the first quarter, deferred revenue came in higher than our expectations. And that's because we are seeing an uptick from customers who are prepaying, and on an annual basis, that's point number one. We had a really good quarter in terms of streamlining our ARR efforts and collections, that's point number two. And just overall working capital management makes us feel incrementally more comfortable to inch up the guidance.

Got it, okay. And I guess another question just relates to you had kind of a long-term plan here and roadmap to get -- monetize the enterprise market, but obviously some kind of events outside of your spear of influence have happened with competitors. And I'm just curious that the earlier question about sales and marketing and when we see some leverage. But I'm just curious because of some of these opportunistic situations, could you talk about what you're doing with the enterprise sales force. I mean I have a sense of how big it is, but if I looked at Avaya, I mean, its 100 per sales rep. So, have you accelerated some of the hiring or even maybe potential opportunities to bring on some talent from some of these legacy vendors? Could you all talk on that?

Hey Terry, Vlad. What I'll -- I apologize, if this comes across this too snide, but usually there is a balance between or a choice between investing in the product and just investing in the sales force. And we're going to add or making the product that kind of wants to sell itself. So, with that in mind, we clearly do have a growing sales force. It is a fairly small compared to Avaya's and Dave will provide maybe a little bit more color here. But in general, we do have coverage domestically in every region. It's same coverage, but it is coverage. And we are -- philosophically, we are investing just ahead of revenue. So, you should expect some growth there. Dave, if you can maybe add some color.

Yes, and as we've -- I think answer on several points of what you talked about is yes. There's gaining and market momentum both from the customer perspective, from the channel perspective, as well as we've typically taken a measured approach to expanding into new segments, but we're seeing very encouraging results in the enterprise segment and are continuing to grow the teams very quickly. And we've been able to bring in significant leadership of with industry experience as well as software experience. And so all of that has helped expand that significantly and the shape of that team is -- I'm very enthused about where we're at with that team.

Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Hey, thanks guys and congrats on the quarter and all the new positions. Turning to the contact center, you spoke to mid-market adoption kind of rising to 15% from 4% a year ago. And just wanted to know is that a better sales motion? Are you just seeing more customers, kind of, wanting that product. And then on the second question, just on Hyatt, if you could just speak to how long that sales cycle was and kind of the timeline to roll out or a potential expansion opportunity would be helpful? Thanks.

Sure. On the adoption of the contact center and I think it was the first part of your question, and we have had increased adoption as we continued to gain traction in the enterprise and mid-market segments. We are seeing a interest in customers of coupling those products of the enterprise communication system with the contact center. And we've made significant investments both in the integration of the product as well as the team enablement of our sales teams. As for Hyatt, our typical enterprise deals can be a six to 12 months sales cycle. And with Hyatt as with many of our large enterprise deals, we'll typically see a transition to our services as quickly as two to three months from booking a deal when we're looking at a limited number of locations with doing that transition. And that's what we should expect here.

Thank you.

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

Yes, thanks guys. Mitesh congratulations. Clyde, enjoy the next phase. But Clyde, I do want to start because I know I'm going to get the question. Is this truly it or are you retiring or is there going to be another career after this? What should investors be looking for? And if that's the case, what drove the timing, I know you gave some insight in your prepared remarks, but any additional color would be helpful.

So, sure thing, Sterling. I'll miss this place. I'll miss the team that's on the call with me today and all of the employees at RingCentral. I'll miss the product because it's a terrific product and I've been passionate about it over the years. What drove the timing Sterling is, and I'll be candid with folks as I always been, my wife retired earlier this year. My daughter is -- my younger daughter is in the high school. And so you couldn't get a better opportunity to spend some time with them. And I think if you look back and talk to a lot of folks, they look back in the life and say take the quality time to spend with family. So, that's part one. But other part of, as we described earlier, Mitesh and I have worked together for the longest while since I've been here. Mitesh is ready to take over. So, those -- intersection of those two things gave me the opportunity to spend time with family and I know some investors takes and says that's usually, euphemism, that's real. I'm actually going -- I'm driving a big bus, a 60,000-pound bus, starting in June across the country. It sounds like an old man, but I'll enjoy it. I don't think I'm retiring, but I have no idea when I'm going to come back. If I enjoy the ride, I'll spend up to a year. My wife has a different over or under when I'll get bored, so people who know me will be. But in any event, Sterling, I'll be rooting heavily for RingCentral in the sidelines. I'll be available to the team if they need me, but they get to call me when I'm not driving the big bus. Hope that helps.

That's it. That's perfect. And put me on the list with John or people that are jealous of that situation. And then just one follow-up question. So, we've had all of the talk and noise about AT&T as a channel partner et cetera, et cetera, but what I'm curious about is obviously with the channel program that you have and some of the changes that you made, there's other areas that are really stepping up to probably produce more than what they had been previously given the structure, I just want to make sure I'm clear what are those pockets of areas within the channel and the partner programs that are really getting the chance to step up and contribute more?

This is where we're getting traction. The question is where we're getting traction on the channel side? Is that what you--?

Yes, so if we go back to last quarter and talk of AT&T and different changes around how they're viewing their go-to-market with you. It would seem like given the growth that means other partners are probably contributing at a faster rate than what they did a year ago. Where are those areas that are getting incrementally stronger, if AT&T is maybe just kind of treading water at this point?

Yes, absolutely. So, we've talked a lot about the channel partners and how they're contributing to our mid-market and enterprise success. And in there, we have different types of partners. So, we talked about signing 20 last year. When we talk about national partners or partners with employed salespeople, you talked about people like CDW or Carousel or SHI. When you talk about Master Agent that we've had success with, or organizations like Intelisys or Ingram Micro. And then we've also talked about like the Google partners, which are their own set of partners. We talked about [Indiscernible] and CTS, last quarter, when we signed a new person in that premise this quarter. So, I think there is a lot of different pockets that we are having success in, in our indirect channels and flowing the entire category to continue to grow and diversify significantly.

And just -- I'll just add one small color to, on the financial side to what Dave said is if you look at the bookings from the indirect channel. The channel partners now contributed about 60% of the new bookings came from those pockets Dave mentioned. So, you can see the change of guard, or shift in the guard from the carrier partners we had earlier to the new channel partners Dave mentioned I think and this momentum is just here to stay.

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

Great. Thanks. Great quarter and congratulations Mitesh and nice work over here, Clyde and if your bus makes it through Atlanta, let me know. [Indiscernible]

You got it. That's the Golf clubs pit under the bus. So, we'll be happy to do that.

Excellent. Just I think Mitesh you mentioned a couple of things that enhanced sequential growth in the quarter. One other thing you mentioned was just sort of better monetization of the customer base I believe. Can you just elaborate a little bit on what you meant by that?

Sure, sure, Mike. So, as you know, we continue to add features and we've been expanding our value proposition of all our products. And also if you look at the brand awareness that has only gone up over the years in the marketplace. So, we have had an opportunity to better capture the value and so we did, and that we've baked into our guidance going forward.

Okay. Got it. Thanks. And then just on the sales cycles. Can you talk a little bit about -- has there been a change in the sales cycle in the mid-market and separately the enterprise segment versus say a year ago?

I think what we see is in those segments you're looking at when you're in early on a deal, a six to 12 months sales cycle. We do -- when we brought in by partners, we have often can come in, in the middle of that cycle and have an even much more accelerated close in that. So, I think you see that with partner segment today. But I do think those sales cycles will kind of continue to be about that length. It's a very considered purchase by these customers, but it's something that even in hotly contested deals like Hyatt, we're able to demonstrate the power of our product and be successful.

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

Hey guys. Just a couple of questions for you. One, I wanted to know on the follow-up to the Morgan Stanley question about Avaya was one or Hyatt I think particularly with Avaya. I was just wondering if you could share with us the sales cycle, what you think the typical sales cycles will be for those Avaya replacements to still differ from the enterprise sales cycle you laid out. And then secondly, just if you could share with us you mentioned in your prepared remarks that you're investing in areas where the enterprise customers you're talking to, want to see innovation and see development. Can you share with us specifically what are some of those areas that they're asking for? That's it. Thanks.

Yes. So, I think, again, the question was sale cycle on enterprise and Hyatt. We talked about six to 12 months, Hyatt was right in that, it's actually closer to the six month on that one, probably more like eight months on that deal. And it was -- we got through an RFP and there was -- everyone responded, but we quickly got down selected and selected overall and we look at several months' transition as they move onto our service. And the second part is what our enterprise customers asking us for product enhancement and capabilities. And we see that -- we're making significant investments in the open platform aspect of our product and the globalization of our Global Office product are critical as well as the tight integration that we've announced at Enterprise Connect with our enterprise collaborative communications, bringing the team messaging and enterprise communications together. So, all three -- all of those areas are very critical and our expansion into the enterprise segment and our differentiation in the market.

Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.

Great. Thanks. And Clyde and Mitesh, I echo with the previous comments, I guess a couple of questions or follow-ups, maybe just quickly somewhat obligatory. Coming back to AT&T, I think in the prepared remarks you indicated you did win some new business in the quarter that benefited the ARR, but that you weren't expecting new business in Q2 if I understood. And I guess I'm just wondering is that's just the same conservatism you had or is there new messaging from AT&T and that relationship, any real change there? And then secondly, just as I think about the global opportunity, the RingCentral Global Office you went from 600 to 700 customers, I guess, on that platform. Is that principally U.S. based companies with offices in Europe. And if so, how should we think about the opportunity to really expand distribution in Europe and outside the U.S. and over what timeframe?

Sure, I'll take the first one and I'll let Dave take the second one. So, on AT&T, we did see some business from AT&T in the quarter in Q1, albeit at a very meaningfully lower levels from a year ago. So, in terms of the forecast, we're not changing anything. We are assuming the same thing, which is no net new ads from AT&T and normalized churn from the AT&T business. So, no change there. I will say that if you look at our full year guidance, despite those -- if you look at the total headwinds that contribute from AT&T, it's about three to four points of headwinds from AT&T, resulting from that. So, anyways, our guidance reflects all those things, but no change to philosophy there.

And on the Global Office, that has been a very strongly received product offering and we've continued to expand the number of countries we're covering. So, you'll find from all directions. So, from U.S. organizations, we talked about, Ultratech being on Global Office and having been a semiconductor tools manufacture, having operations globally, and in Asia. As key we had a customer in the U.K. Paramedic Science that expanded Global Office, it's actually back into the U.S. and into Canada. You see examples like that as well as we see those organizations having Global Office users across Western Europe and APAC and Latin America. And that all led to part of our interest in launching our European offering, which allows us to do direct sales into those countries. So, I think you'll be seeing more of Global Office going in new directions as we bring on new organizations outside of the core countries we sold to historically and bringing all their users globally on to our product.

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

Great. Thanks for taking my question. And I'll add to the kind words for Mitesh and for Clyde. My two questions really are focused on pricing. I'm just curious what the pricing environment is like. You talked about, for example, at the Hyatt, you competed against other pure cloud competitors, they kind of offered the same total cost of ownership savings versus at-premise provider. And you talked about some of your differentiators in terms of with team messaging and contact center. How much -- what was the pricing environment in those situations?

Yes. So, our customers -- one, they're looking to get off a legacy product and they're seeing the advantages that they're getting by being cloud with mobility, usability, the global capabilities of rapid innovation. So, I think it's less about how it compares to that. And when you look to move to the cloud, obviously, these large organizations, we provide different pricing for larger enterprise organization. But the ability to sell across multiple solutions and replace discrete on-premise solutions or even cloud solutions, whether that's meetings, contact center and Unified Communications allows for the customers to have extremely strong ROI in replacing those systems. And so that's what we're benefiting from as well as our ability to continue to deliver rapid innovation like our collaboration solution across all our users.

That makes sense. And maybe I wasn't too clear on my question there. I guess, first is your pure cloud competitors who can offer the same total cost of ownership, cost savings across multiple products, contact centers, UC that kind of stuff. Are you seeing a more competitive environment? And are you seeing pricing being the initiative on top of product differentiators? And then really my second follow-up question was are you being a pricing leader by chance? I know this is for your channel harmony program that you're awarding 100% commissions to your channel partners and you've seen that you are in unique compared to others in industry. Is that just a indirectly of providing pricing discount to your partners and to your customers?

Yes, Vlad here. So, I guess, let me take that. So, look, I'm not so sure that we agree with the statement our competitors have the same product to offer, they do not. We already went through some of the main differentiators. Again to recap, we're talking to the world's best global footprint. We're talking to the world's only fully integrated collaborative communications solutions, and we're talking to the world's only open platform, all under one umbrella, okay. And these are objective, not subjective differentiators. Subjectively to the emphasis on mobility, user experience, all of the things, just for example, will make Apple great, okay. So, we do see power of the product getting today for us. We do not perceive ourselves as price leaders. Certainly we need to price competitively, but there have been numerous occasions where people try to win against us on price alone. And generally it doesn't work. I need to remind everyone, what we have is a mission-critical application. If business communications goes down, even for a few minutes, that has tangible business impact. And what we haven't done much on this goal, for example, is we haven't talked about our uptime and the SLAs that we're able to provide and backup and millions of customer reference examples that we can now cite against our competitors. Some of them interestingly enough are not just our satisfied customers that we won, but also competitive takeaways where people have been able to experience some of our direct competitors and at this point are now happy and referenceable with central customers. That goes a very long way.

We have time for one last question. Our last question comes from the line of Kash Rangan from Bank of America. Please proceed with your question.

Hey guys. Hey Mitesh, congratulations, it's been great to watch your career progress over the last 12 years and look forward to staying tuned over the next several, several dozens of years. And Clyde, congrats to you on training a superstar, not too often do we find public company CFO is training the replacement as effectively as you did and achieve the seamless transition. So, congrats to you, Clyde. And I have to ask a question about the business and I was blown away by the number of seven-figure transactions you did. And I'm curious to see these seven-figure transactions were wall-to-wall RingCentral implementations or are you testing the waters with some kind of deployment? And if that goes well, you're surely positioned to win repeat business and therefore, trying to understand how much more penetration do you have left in your seven-figure accounts? That's it for me. Thank you.

Yes. Thanks, Kash, this is David. And thanks for the recognition on the seven-figure deals. And it shows kind of consistent and increasing performance two quarters in a row now. In -- so we get -- we'll get some of those deals will be the entire organization, but as we continue to penetrate into the very largest organization, some of those deals are just a starting point even though they're initially contracted for a very large amount. And I think when you look at our amount of new business that we're getting from our installed base is at 40%, which is a very healthy and slightly increasing number over time. So, this opportunity will continue to develop and to grow as we take examples like Hyatt, where our initial sale is into headquarters. It's obviously a much larger global organization beyond that. So, there's going to be many, many more opportunities for expansion within some of these enterprise accounts.

I'd like to hand the call back over to management for closing comments.

Well, I'd like to start-off by, again, thanking Clyde for his outstanding contribution. He was the CFO that took us public. Under Clyde's leadership, I believe we've compiled a perfect record of beating and raising every quarter. And honestly, we probably will not have been here without Clyde. Having said that, he is less so far his contribution he has been in providing outstanding mentorship and training for Mitesh. So, I feel very, very comfortable that we will have a seamless transition, which is especially important for us as we are closing in on our $1 billion revenue target and are now beginning to think of life beyond $1 billion. So, with that, we feel good where we stand competitively. We had a very good quarter. We feel good about quarters to come. We've done our best to highlight some of the seasonal effects that may take place. But generally, we feel we're on solid ground now. It's great to now be recognized by the investor community, a little bit better than we used to be. And we hope for a lot more together. So, thank you very much and thanks for wonderful and supportive questions.

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