RingCentral, Inc. (RNG) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the RingCentral Fourth Quarter 2019 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, Ryan Goodman. Please go ahead, sir.

Thank you. Good afternoon, and welcome to RingCentral's fourth quarter 2019 earnings conference call. I am Ryan Goodman, RingCentral's head of investor relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Anand Eswaran, President and Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand, and Mitesh, followed by Q&A. Some of our discussions and responses to your questions will contain forward-looking statements. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, our GAAP to non-GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available, as discussed in detail in the slide deck posted on our Investor Relations website. Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings release and in the slide deck. With that, let me turn the call over to Vlad.

Good afternoon, and thank you for joining our fourth quarter earnings conference call. We delivered an outstanding fourth quarter with continued strength in mid-market, enterprise, and general. Additionally, we had a number of major announcements and achievements during the quarter. First, I am pleased to announce that we finished the year achieving an important milestone, Namely, which has surpassed our long-term goal of $1 billion dollar annual revenue run rate ahead of schedule. This is a significant achievement for RingCentral, and we continue to be the largest and fastest growing pure-play UCaaS vendor. In October, we announced our strategic partnership with Avaya. In November, we announced that we expanded our relationship with AT&T. And today, we announced our third strategic system integrator partnership with Atos. On the leadership team, we added Anand Eswaran as President and Chief Operating Officer. I'll expand on these key announcements later, after a review of Q4 results. Revenue and non-GAAP EPS exceeded the high end of our guidance. Key drivers continue to be mid-market, enterprise, and general. We continue to see strong contributions from our vertical market initiatives focused on financial services, healthcare, and education. We also saw another strong quarter from Contact Center. key metrics for Q4 were solid across the board. First, total revenues grew to $253 million. This is a 34% increase year over year and is above the high end of our guidance range. Mid-market and enterprise continues to be a key driver of our department. We define mid-market and enterprise as $25,000 or more in annual recurring revenue, or ARR. This grew 59% year over year and is now a $479 million business. Enterprise defines its customers with $100,000 or more in a ARR, grew 71% year over year to $293 million. Channel ARR grew 63% year over year to $300 million. Overall, 2019 was a transformational year for RingCentral, as we extended our leadership in the UCaaS market. Looking forward, our technology leadership, experienced management team, and unique strategic partnership put us in a better position than ever to maximize our opportunities in the $50 billion plus UCaaS market. On that note, I'd like to welcome Anand Eswaran to the RingCentral team as President and Chief Operating Officer. Prior to RingCentral, Anand was Microsoft's Corporate Vice President for global enterprise business. Anand will be responsible for leadership and execution across product engineering, sales, marketing services, customer care, operations, and human resources. I'd also like to take a minute now to express our gratitude to Dave Sipes. Dave announced that he will be retiring from the company at the end of Q2. Dave has played a pivotal role in RingCentral's journey from approximately $10 million revenue company to our current $1 billion run rate. Dave, we wish you all the best in the next stage of your journey, and look forward to your continued friendship and mentorship. I'll now provide an update on the strategic partnership front. First, the Avaya partnership. We attended Avaya's ENGAGE User Conference last week, where we showcased a first look of Avaya Cloud Office by RingCentral, or ACO. Feedback was positive from customers and channel partners. RingCentral and Avaya teams are working together well. ACO is well on track for a scheduled launch at the end of this quarter. The marketing, sales, and support teams have made solid progress to ensure customer success, and training efforts are well underway with sales and channel partners. Next, AT&T. In November, we announced that we expanded our relationship with AT&T. AT&T made Office@Hand by RingCentral a lead offer for UCaaS, as part of its voice and collaboration portfolio. It has been a few short months, but we are already starting to see encouraging trends that are exceeding our initial expectation. And today, I'm excited to announce our third strategic system integrator partnership with Atos. Atos is a global leader in enabling enterprise digital transformation, with annual revenue of approximately $13 billion. The partnership will help extend RingCentral's reach into large enterprise accounts, moving forward with digital transformation initiatives. As part of this partnership, we will introduce a co-branded UCaaS solution. This cooperative solution will be a key part of Atos's digital workplace solutions. To wrap up, 2019 was a stellar year. We are still in early innings of the global cloud communications transformation story. We're well positioned to further extend our leadership with our commitment to innovation, customer service mindset, and the unique strategic partnership strategy. With this momentum in place, it has never been more clear that the cloud is winning, and RingCentral is winning in the cloud. Now, for some color on Q4, I will turn the call over to our new President and COO, Anand Eswaran.

Thank you, Vlad. I'm humbled and energized to join Vlad and the RingCentral team. We are at an inflection point in the way we communicate, collaborate, and work, as every company transforms to be a digital business and workplace. RingCentral is uniquely poised as the leader in UCaaS to partner with these companies in their digital journeys. I am so excited by the large opportunity ahead of us to transform business communications globally. I also want to thank Dave for building an exceptionally strong innovation and go to market team, which has taken RingCentral to $1 billion run rate. I have enjoyed getting to know Dave really well, as we spend every minute together, partnering and working through the transition. Thanks to Dave for the help and support. I will now provide some color on Q4. Q4 was, again, a strong quarter. It was driven by strength in mid-market, enterprise, and channel. We continue to win based on our superior platform and differentiated go to market capabilities. First, a platform which integrates voice video and team messaging continues to resonate with our customers. Our open platform ecosystem expanded to nearly 30,000 developers. I'm also excited to announce that we surpassed 3,000 certified integrations. The ease and flexibility with which our customers can integrate business applications with our communications platform is a game changer. In fact, over 70% of our seven-figure wins in Q4 cited open platform as a key capability in their decision to go with RingCentral. An example of their open platform and mobility that are key is a Fortune 500 utility company with approximately 8,000 users. They replaced Legacy On Premise Cisco Systems with RingCentral Office. Integration of multiple business applications with RingCentral Office, including Office 365 and Workday, was important for the customer. Additionally, the ability of field employees to be connected to a single enterprise communication solution using rugged Caterpillar mobile devices was important. We saw up market strength in our focus vertical markets of financial services, healthcare, and education. In aggregate during Q4, these accounted for over 40% of our seven-figure events. In financial services, we had a standout quarter. First, we are excited to announce a win with Arch Capital, a global leader in providing specialty insurance and reinsurance solutions. We are pleased to see a global 2,000 multibillion-dollar enterprise like Arch Capital select RingCentral for their global cloud communication needs. Another financial institution win in the quarter was Credit Human, a large credit union based in San Antonio, with members across the country. The ability to integrate a complete, unified communications platform with key financial services applications, including Jack Henry, was an important differentiator in securing this nearly 1,000-seat win. In healthcare, we secured a 4,500-user win with Aveanna Healthcare, the nation's largest provider of pediatric home care. They wanted to standardize to a single communications experience across approximately 240 locations, including headquarters and regional offices. Our ability to provide a single, unified solution with high reliability was key to this win. In addition, our mobile capabilities were a strong fit with the home care business model. We also signed a 3,600 user win with U.S. Renal Care, a leading provider of dialysis services. This customer needed a single communication solution across more than 300 locations. They also needed the ability to integrate with existing paging systems. In higher education this quarter, we had a win with National American University. Our unified platform with integrated team messaging and the ability to implement custom emergency workflows were key driving factors in this win. Let me now provide a brief update on the success we are having with Contact Center. Over half of our seven figure wins included Contact Center in Q4. Contact Center is a key element of our land and expand strategy. For example, earlier this year, we secured a 10,000-seat win with a Fortune 1000 multinational software company . In Q4, this customer added 150 contact center seats. Also, earlier this year, we secured a nearly 6,000-seat RingCentral office win with Crawford and Company. And in Q4, we added over 400 Contact Center seats. Additionally, in Q4, we delivered a marquee win for Engage Digital, a native digital customer engagement solution. Richemont is a well-known Switzerland-based luxury goods holding company of many luxury brands, including Montblanc. They needed a single digital customer engagement platform across eight of their luxury brand divisions. Richemont plans to deploy engaged digital globally on several digital channels, such as Facebook, Instagram, and Messenger. We also continue to see increasing traction with our native engaged voice outbound blended solution, with a record number of wins last quarter. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

Thanks, Anand, and welcome aboard. Looking forward to working together as we scale RingCentral to the next level. I'd also like to express my gratitude to Dave for the terrific partnership over the years. Good afternoon, everyone. 2019 was a solid year on several key fronts. First, we exited the year with a revenue run rate of over $1 billion. Second, we grew 34% with an operating margin of over 9%, executing above the rule of 40. We delivered on the $1 billion and the rule of 40 a year ahead of commitment to our shareholders. These milestones are a testament to the large market opportunity, as well as RingCentral's focus on consistent execution. We believe that the rule of 40 is a key metric to evaluate profitable growth across CaaS companies, and as a high bar we will strive to sustain. Third, we are winning larger enterprise customers with well over 100 seven0figure DCV deals for the year. And finally, we signed an industry redefining partnership with Avaya. Our fourth quarter capped the year with strong performance on all key financial metrics. Total ARR grew to $960 million, up 32% year over year, and ARR for RingCentral Office, our core UCaaS solution, grew to $877 million, up 36% year over year. Key drivers continue to be mid-market and enterprise, with the record contribution from channel partners. Mid-market enterprise had another strong quarter with ARR of 59%. This was bolstered by enterprise ARR growth of 71%, driven by digital transformation momentum at large-scale customers. Overall, mid-market and enterprise yet again accounted for over 60% of new bookings. Higher up-market mix is a positive indicator of our profitable growth, given better lifetime value. Channel partners are a key element of our strong momentum with larger customers. Channel ARR reached $300 million in Q4, up 63%, and also accounted for a record number of our seven-figure DCV deals. We continue to broaden our channel network and deepen relationships with key partners, such as Carousel, Solaris, and Westcon. Up marketing channel drove strong results across the board in Q4. Total revenue grew 34% to $253 million. Subscription revenue grew 33% to $229 million. Non-GAAP subscription gross margin was 82%. Non-GAAP operating margin was 9.6%. Non-GAAP EPS of $0.22 was above our guidance. Operating and free cash flow includes approximately $37 million of one-time payments stemming from our recent partnerships. Excluding these items, our free cash flow margin would have been approximately 8%. Now, let me provide some financial color on our recent partnerships that we believe to be additional drivers of our long-term performance. Starting with the latest news first, as we announced today, Atos will become a strategic SI partner to RingCentral. We expect RingCentral to accelerate its large enterprise reach by joining Office's digital transformation portfolio. Given the sales cycles for larger enterprise, we are not assuming much contribution from Atos in 2020. And now for our industry redefining Avaya partnership. ACO is on track for launch at the end of this quarter. We have received positive feedback and interest from both customers and partners alike. As we mentioned before, it will take time to ramp the go to market motion following the launch. As such, we continue to expect revenue contributions from a ACO to start towards the end of 2020. Now to the 2020 financial outlook. We expect total revenue to be between $1.125 billion and $1.135 billion for an annual growth of 25% to 26%. We expect non-GAAP EPS to be $0.93 to $0.94, based on a fully diluted share count of 94.5 million. This reflects additional impeded shares from the convertible debt due to stock price appreciation, as well as shares issued to Avaya in November. Excluding these items, our EPS guidance range would have been $0.04 higher. In summary, 2019 was an outstanding year for RingCentral. Our industry-leading product innovation is driving increased demand from customers, channels, and strategic partners. Long-standing industry leaders that vast go to market are selecting RingCentral as a UCaaS solution for their customers. With these two elements, we are more confident than ever in our ability to continue to lead in this $50 billion UCaaS market. With that, let me turn the call to the operator for Q&A.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Bob Ansari from William Blair. Your line is now live.

Hey, you guys. Do you hear me okay?

Yes.

Great. Congratulations. That was a phenomenal end to the year, and you've beaten revenue nicely in consistency over the many, many years I've covered you. But you absolutely crushed it, the beat, both percentage and so as always, I think is the biggest I've ever seen. I guess maybe Mitesh, starting off with you. Just drivers to just the strength of the upside in the performance here on the top line and subscription would be helpful.

Thank you, Bob, for the kind words. The beauty of having multiple drivers in the business model is that not every driver needs to work every time. But this time, we did have strength across the board. I hit the hot spots on the drivers here, but one for you. So the first one is large deal momentum, and new logos within that. We did have a record number of over 30 deals, which are seven figures or more this quarter. And 70% of those deals were net new logos, which actually exceeds land and expand going forward. So, that's point number one. Within point number two is strong upsells in the quarter. We did see very consistent upsell in the quarter, and again, over 40% of our new business came from existing customers. Third one is looking at clarity, which was a surprise to our expectations at least, where we had a fastest car to Q4 than usual Q4s, and this is despite the fact that we are going further up market, which may be an indication of shortening sales cycles at the margin, and plus our push in the vertical side. So that's number three. And last is channels, where we did have a very strong quarter on the channel. 70% of the deals, over $1 million, came from the channel. So, those are three or four drivers that really led to the upside. Now going forward, we are layering on more growth dials, like Avaya, like AT&T, like Atos, which will provide even further long-term durability to our growth story.

That's really helpful, Mitesh. Thanks. Then one quick one for Autumn on -- just as you think about RingCentral today, obviously Vlad and Mitesh, and team have done a really nice job moving from really small businesses to midsize businesses enterprise. Your history is, again, with SAP and Microsoft, with very large enterprise. As you think about sort of where RingCentral might be, and no near term, but five years, just would like to get some color on how you think about the go to market changes or the go to market layering you'll do to sort of drive even further growth within the enterprise. What do you think the setup today is -- will get you there without sort of incremental investments or changes? Thank you.

That's a great question. So, one of the key things you said is important. It's not go to market changes as much as layering because what we have is a great foundation, and we have people who continue to accelerate the growth we create our the mass market segments. The growth layers we expect -- Mitesh walked through some of them. Our partnerships with Avaya is going to be a big contributor of growth as we look ahead, and that's going to span all customer segments. We expect the same benefits to come in through the other relationships we are creating, and we talked about Atos right now. And then the other layers which we will start to look at even more broadly is one, expanding on getting deeper into verticals and starting to actually create a little more density of both focus and coverage, but also innovation and IP from a vertical standpoint. That's going to be key. And that will allow us to then actually go and penetrate up market, basically mid-market and enterprise, in a much more broad strategic manner. So partnerships and basically vertical focus is going to be some of the keys on how we look at adding layers to growth.

Got it, helpful. Thanks and congrats, guys.

Thank you. Our next question is coming from Terry Tillman from SunTrust Robinson Humphrey. Your line is now live.

Yes, thanks for taking my questions, and all that goes -- congratulations. I guess maybe, Mitesh, first question for you just relates to historically, the philosophy of profitable growth. You obviously have some new growth vectors here and then layering on more investments in the existing go to market, but I'm just wanting to hear about the balance of these investments, but also showing sales efficiencies. I'd love to get a perspective on sales efficiencies, and maybe pinpointing where you might see some of that if you're going to see some of that over the next 12 months. And then I have a follow up.

Thanks, Terry. Yes, for us, it's always about discipline in investment and profitable growth, as you pointed out, to capture this large market. If you look at the go to market motions, there are three key areas of investments for us. One's a direct site, one's channels, and then one is, as you call, layering of the strategic partners. So, let's double click on each one of them. If you look at the direct side, what we are seeing is that we are able to maintain our sales and marketing efficiency year over year, despite the fact that we're going up market, which is typically longer sales cycles. The reasons for that are -- one is a highest percent of our apps our ramped in the segment, which lends to more productivity, and if you actually look at the highest end segment within the enterprise side, we -- our reps are producing about 52% more year over year. So, those two vectors are playing really nicely. Then if you look at the other two, which is channels and strategic partners, both of these growth come at very accretive growth economics to the overall margin profile for 2020, given the lower upfront costs we have to do and lower churn. So if you add all these three motions together, you're actually helping an efficiency, and as we further go up market, and they're actually freeing up dollars for us to invest in the future. So it's a virtuous cycle for us, Terry.

That sounds great. And I guess as it relates to these newer or expanded partnerships, I think you already are well in terms of Atos. Don't expect really much this year because of longer sales cycles. Avaya's still ramping, but let's go back to AT&T. I'd like to get an update on that in terms of just the increased emphasis by them to actually push your product. You said you've seen some really interesting activity, but I'm curious how material could this expand a relationship with AT&T be this year? Thank you.

Yes. For AT&T, it could be a materially new driver for us. We have not dialed in much in 2020. Here it's going to be stabilizing. By the last go around, it was a $15 million business. So given the new expanded relationship and them choosing us to be a lead provider, this could be a broader one this time.

Thanks you. Our next question is coming from Heather Bellini from Goldman Sachs. Your line is now live.

Great, thank you so much. I had a question, Vlad. Just -- you mentioned that at the Avaya meeting, the partnership meeting last week, that you met with a number of partners and customers, and I was just wondering what feedback you got and if there's anything you can share with us in terms of whether it'd be specific industries that maybe showed the most interest, or size of customers. And then I had a follow-up question on that just related to the fact that you look at the Avaya SMB customers that are currently paying, where -- can you walk us through kind of how to think about the incentive structure for those people to move over to a ACO? Thank you.

Sure, yes. Hi, Heather. So okay, let's do that in that order, like you said. So we and me personally met with three or four of the [indiscernible] partners. Everyone was universally positive. Frankly, major message was growth, and growth, what took you guys so long. The field clearly wants a cloud based pure cloud product from Avaya. And here it is. There was really no pushback. One of the partners in particular, and it's a major one, was basically saying that, hey, we're all in. We are not so much even interested in offering anything but ACO to the customer base. So that was great for us to hear. These people have questions as to the logistics. But by and large, we're to handle those. So I would say that there are no red lights. There are not even a yellow lights at this point. I mean, it's just -- people are just waiting for the product to really be there. And most of our conversation really was, look, are we providing enough training? Please tell us sort of what else -- what other supporting materials you need, like that. So just operational sort of tactical stuff, but nothing at all negative or even inquisitive on the product side or overall partnership.

Great, thank you.

Right. Thank you. And as far as the second part of your question, what is the incentive to ACO customers to the [indiscernible].

No, it was more -- a lot of -- the big question that people have is the product going to have its most success at first with the non-paying customers of Avaya and the SMB channel? Or could it be that the functionality of ACO for the existing paying SMB customers is vastly better? So they might actually be the easier ones to convert at first. I'm just trying to think through kind of that and the potential incentive for them, just from a functionality standpoint. Thank you.

I just wanted to be sure. No, very fair question. I want to be a little bit nuanced here. There is no such thing as a non-paying Avaya customer. Okay? When people say paying versus non-paying, I think they need maintenance contracts or not. But even people who do not pay maintenance are very much paying customers. It's just they are not paying Avaya directly, but they're paying to a number of service providers to light up their box. And either they're paying maintenance to someone else, maybe the general partner, maybe it's another maintenance organization, or maybe they're just self-insuring, but to keep up, a corporate PBX does take money. That stuff does not run for free, even if you take initial CapEx depreciation out of the equation. So at the high level, answer is -- and we highlighted it, but I'll reiterate what e highlighted when we were first introducing the partnership. Our core belief is that we can come in, even into a customer that is sitting on fully depreciated hardware, and still make a business case to where they get all of the power of the cloud. And our industry leading product, which is, as you will know, has the world's best, most best received voice, business voice, but also has messaging, has video, has open platform has largest available international footprint, and they can get all of that for no more than they're paying now to even keep up the legacy technology. Okay? So hopefully that answers the question. Now, having said all of this; just as a reminder to everyone, much of the base is really covered by the partners. So it's really whomever partners find easiest to get through, and we're just following the lead. And early -- so the anecdotal evidence seems to suggest that it just cuts across the board. It's people paying maintenance as well as those who don't because in the end, people want to go from legacy on prem to the cloud, so it doesn't really matter. The few dollars a month they may or may not be paying to Avaya for maintenance doesn't really matter, given the overall productivity enhancements that rank and Avaya Could Office by RingCentral have to offer.

Great, thank you very much, Vlad.

Thank you. Our next question is coming from Brian Peterson from Raymond James. Your line is now live.

Congratulations, gentlemen. And Anand, welcome to the call. So I want to just circle back to Vlad's comment on AT&T ramping earlier than expected. Clearly, that's been a large relationship in the past. I just want to be clear on what's baked into that guidance in 2020 and maybe beyond from the AT&T relationship.

Yes, thanks, Brian. Terry asked about this question as well. So what we -- financially, we saw an uptick sequentially in bookings by about 15% to 20% after AT&T made as their lead provider, so that was a sort of a change in step function change we saw. Overall numbers for the bookings are still small, but given the new business growth we are seeing, the overall install base has stabilized now, and it won't be a drag to growth as in the previous year. So it should -- overall, it should help the financial performance of RingCentral overall going forward. And we are looking forward to build upon successes with leveling the verticals and GOs there in AT&T.

Got it. Thanks, Mitesh. And Anand, maybe just one for you. Any thoughts on how you can target some of the key verticals here at RingCentral? It'd just be useful to kind of hear how you're thinking about that playbook over the next few years. Thank you.

Absolutely. No, it's a great question. So the way we're looking at it is one, partnerships are a key avenue to actually targeting verticals. So that's why we talked about the strategic partnership with Atos, and you can expect to see strategic partnerships as our key vector. And when we work with an Atos, we are working in -- how they work with their customers and their digital transformation journeys by verticals. And we are basically plugging our open platform across UCaaS and CCaaS into that digital workplace playbook. So the first vector of how we expect to do this is through the strategic partnerships. The second thing we are doing is actually going at the specific verticals we want to focus on, and we are basically looking at the critical processes and workflows within these verticals to see where is it that our platform will actually be a core part of these processes with -- customized to each vertical. So basically that workflow slash IP combination and the strategic partnerships, which we will double down on, those two come together to allow us to actually create meaningful vertical solutions, which connect to the customers' business and their outcome. So that's the playbook.

Thank you. Our next question is coming from Sterling Auty from JP Morgan. Your line is now live.

Yes, thanks. Hi guys, so you talked about the timing of the release of the initial ACO product. Just kind of curious what your thoughts are on the initial timing of the migration tools to help customers get up on the ACO.

So, I can take that. So the product launches on March 31. And right off the back we will essentially be supporting all of the Avaya endpoint. And right off the back we will have the automatic migration capabilities embedded into the product. So there is no lag in timing between product launch and the automatic migration capabilities to take every customer of Avaya on prem to the cloud.

Got you and then one follow up on the Atos partnership, you know, very familiar through the years the work that Atos has done, especially in Europe round, you know, a lot of infrastructure, software, etcetera. But I'm not as familiar with their UCaaS capabilities. Is this something that they have a broad practice already? Or are they using RingCentral to kind of launch their presence into bringing UCaaS to their customers?

That's a great question actually. So what we saw as we look to work with Atos is they have a core, the core of Atos transformation is around digital transformation practice on how they are taking their customers in their journey of transformations to be a digital business. And one of the core elements of what Atos is doubling down on there is essentially the digital workplace. Because at this point, every company looking to digital transform, the critical success factor of either failure or success is actually culture and how they change the way companies both internally and externally communicate, collaborate and work. So essentially, our partnership with them is to be this foundation of their digital workplace offerings in their work with their customer's digital transformation. So that's literally where this whole thing fits in digital workplace to help Atos digitally transform their customers.

Got it. Thank you.

Thank you. Our next question comes from George Sutton from Craig-Hallum. Your line is now live.

Thank you. I was lucky to do a demo of the ACO FDA engage last weekend. It was fairly clear that the collaboration tool would be your Glip [ph]. It was less clear what the plans were relative to the messaging and also longer term, the contact center so I'm curious if you could provide some clarity there.

Vlad here, I appreciate the question. Look, we are going to provide additional details on ACO a CEO at the time of general availability, which as we indicated, is going to be later this quarter. What they can tell you is that each and every component of ACO will check all of the boxes will be world class and we'll address our customers' needs. But as well as decisive if you can just please indulge us for a few more weeks.

Just a quick follow-up. It looks like there was some IP acquired in the Atos deal. Can you talk about what IP that might be? And will that extend into the U.S as well?

I'll start with the second part. Yes, of course, IP is IP, so it's international in nature, there are no limitations associated with that IP. Broadly speaking it's in the messaging, communications and collaboration space, and it includes know how some cold and you know fairly sizable patent portfolio. But that's all, contractually, that's all we can share at this point.

Okay, thank you. Nice results.

Our next question is coming from Nikolay Beliov from Bank Comerica Merrill Lynch. Your line is now live.

Hi, thanks for taking my question. My first question is for Mitesh. Mitesh looking at the growth in new channel business grew 63% for two quarters in a row, which is pretty good performance. And the growth while channel seems to be tracking closer to the enterprise growth rate rather than to the mid-market growth rate, I just want to dig into this a little bit. And also what are you guys seeing with channel economics? Where do we spend versus let's say a year ago?

Sure, Nikolay. Channel has been a key growth driver for it's a $300 million business. As you said growing over 60% it is now about 35% of the total ARR gain, 5 points of shares since last year. Channels we did see record bookings in the channel this quarter. And even in the up market saw over 70% of our total million dollar deals come from the channel and that again dovetails into okay isn't just grow or isn't that good growth economics. I think channel is a very profitable business for us; it's more profitable in dollars wise than the direct business, given the higher lifetime value to CAG, with the lower upfront investments we have to do and better churn. So I think the strategic partners going forward will add to the flywheel effect there and help us drive more profitable growth.

And question for Vlad. Vlad I want to circle back on the ACO migration, so our conversations with channel partners by RingCentral, the channel guys really excited about the migration. So if you can maybe help us illustrate, okay today an Avaya customer is moving to RingCentral, let's say an Avaya being market customer and it maybe takes two to three weeks, whatever it is to do the migration, the manual migration and whatnot. With ACO version 2.0 which is going to launch in May and June, when you're going to have the migration tools, what percentage of the migrations do you think is going to get automated and by how much is going to cut down the migration time and clearly that has implications on time to revenue and competitive dynamics and all that. Just trying to look at this [indiscernible]. Thank you.

Sure. Hi, Nicholas. So, thank you for noting and understanding that the MVP that's going to go out in, like we said later this quarter. Migration tools are really not going to be there. And we have not as of yet committed to a at least publicly we have not disclosed any specific timeframe for migration tools. I can tell you that it is very much front incentive for us to get this going. You know, once the basic checkboxes are done. Look the idea is to simplify migration and at the high level that means basically being able to import all of the account specific information whether it be, you know, IVR, you know, companies contacts potentially we can talk about importing even voicemails that were left with on a live etcetera. So that extent, I would expect more of a gradual process is going to be sort of a moving train will be introducing these tools over time, but certainly we've to cover all of the migration cases eventually. So, I would say all the time to the extent possible 100% just with the caveat Avaya has multiple user bases internally and for example some of the nodal customers, it may be hard to get the data out just because of the generation of that technology. But for IP office, there is more modern software involved, we expect to be able to get to the data and to be able to import it into ACO.

Thank you.

Thank you. Our next question is coming from Meta Marshall from Morgan Stanley. Your line is now live.

Great, thanks. First question just on the Atos relationship, any additional investment needed by you guys to launch or will be on this kind of co-branded product? Will they be fronting that investment? And then maybe second question on the contact center business. I'm seeing that your kind of attach rates are increasing their. Does any color as to whether those are still primarily kind of in contact implementations or whether you're seeing uptake of kind of mellow Connect First homegrown products? Thanks.

Sure. Meta, hey its Mitesh I will take both. The first one on Atos, yes of course there is investment required to get this up and running. It's all contemplated in our guidance. So our guidance would have been up even more if there were not these investments, but that said, we do given the go to market motion there. We do think that this relationship is going to be accretive right from the get go. So that's part one, part two on the contact center. Right now predominantly It is our in contact business. Although we are things in green shoots with the Dimelo, Arnand did call out the Swiss brand at Mont Blanc. I love those pens by the way. So yes, so we are seeing green shoots there. But early days for that.

Got it. Thanks, guys. Congrats.

[Operator Instructions] Our next question is coming from Michael [ph] from Wells Fargo. Your line is now live.

Hey there, thanks. Good afternoon. Mitesh we've seen a bias in UCaaS towards customers paying on a monthly basis. Just wondering if you could provide some color around your expectations, given that backdrop for the shape and variability of deferred revenue in the model here?

Yes, sure. Thanks, Michael. And welcome to rejoin RingCentral earnings call. So thank you for again, picking up coverage. So in terms of deferred revenue, yes deferred revenue is a function of more the payments the customers have, and not quite a function of the length of the contract. So on the free payment; what we're seeing here is two trends. We're seeing a normalization of our customers. Paying us on annual fee base, which is actually helping us give less discount up front, that's one. And products like contact center are typically built in years. So that actually have an impact on deferred revenue. But on the length of the contracts, customers are signing up for multiyear contracts with RingCentral, given the more comfort level they have with us. And so if you were to take a duration impact from this overall equation, I think ARR extracts this noise and it leveled the playing field in terms of forward looking indicators. So I think for our business, and quite frankly businesses which have more bias towards monthly payments, I think I would steer our investors to look at ARR growth.

Thank you. Our next question today is coming from Nandan Amladi from Guggenheim Partners. Your line is now live.

Thank you. Good afternoon. So now that you've passed the billion dollar run rate a year ahead of schedule, have you thought about updating your long term model?

Sure, Nandan. We have thought about it. First of all thank you for noticing that yes, we did clear this billion dollar hurdle ahead of schedule. And the goal is again to look, keep on layering on more investments in both product and go to market. To put a new long term target out, it makes sense for us to gauge how all these initiatives are panning out be it AT&T debate, Avaya debate, Atos and then provide a very thoughtful long term model overtime.

Thank you. Our next question today is coming from Will Power from Robert W. Baird. Your line is now open.

I just want to come back to Atos it sounds like this could be the first and maybe some additional strategic opportunities. So I guess I want. A, how many more deals like this potentially out there, are there, either in Europe or the US? How should we think about that? And as part of that is there any way to kind of help us frame how to think about the ultimate sizes [indiscernible] expecting much revenue contribution this year? But is this something that you expect to contribute maybe $50 million in revenue a few years out? Could it be somewhat similar to AT&T over time? How do we kind of think about that? Thanks.

Hi, Will. I think again look, we just think the deal last quarter, so early days. But if you look at the overall potential Atos is a number one digital transformation player in Europe with deep transformation projects across the board. And I think there's an opportunity for us to have a place where communication becomes a hub with all these major cloud transformation projects they have A. Part, B, they also work with G Suite, Microsoft, ServiceNow, Salesforce, all of these, which are key integrations for us. So there's a real avenue where we are dragged along with this end to end projects. Now in terms of what revenue opportunities there could be, it could be meaningful. But again, it's very hard to tell at this stage given we just inked the deal, so stay tuned.

Thank you. Our next question is coming from Samad Samana from Jefferies. Your line is now live.

Hi, good evening. Thanks for taking my question. So Mitesh, just for clarity so the 25% to 26% growth outlook for 2020 does that include the Avaya ramp later in the year that you mentioned, and then maybe just international how the performance go there, we haven't heard much about that and maybe just how large deal performance was outside of the U.S. Thank you very much for taking my question and congrats on awesome quarter.

Samad, you were supposed to ask one question, you jammed in four, but it's okay. So first of all on the guidance, it does assume some minimal contribution from Avaya in the guidance, but not materials. At least because we're getting started that's part one. What's the second part of the question international you said?

ID [ph] there.

Yes, so international. Yes, we saw international is about call it 10-ish percent of our revenue. And it is growing very nicely above the overall growth of the business. We feel that Atos and Avaya will be vectors for ramping up the international growth for us going forward as both of these companies have significant international presence.

Thank you. Our next question is coming from Richard Valera from Needham. Your line is now live.

Thank you. Congratulations on the nice finish of the year, gentlemen. Follow up on the contact center discussion before I'm clearly you've had great success in selling a tightly integrated contact center with your UC product. Just want to think about how you're thinking about ACO, you're going to have essentially a UC product, UC see cloud product, Avaya is going to have cloud contact center product, presumably about a third quarter of this year. So how do you think about sort of the long term trajectory of ACO with a cloud contact center and how critical that is to making this ultimately successful?

So, what I would say is it's always beneficial for RingCentral when customers decide to move different applications and especially in the case of contact center to the cloud. We will be able to better gauge at least as it relates Avaya's CAS product. We will be probably able to better gauge the impact of that once it is on the market. It's hard to actually say anything to it right now.

Thank you. Our next question is coming through James Fish from Piper Sandler. Your line is now live.

Hey guys, congrats on a fantastic quarter and end of the year, and congrats [ph]. Just I'll squeeze one in for you. Can you just walk us through exactly what does marketing changes were made by partnership ready to go already? And I guess, any sense to how channel partners can get compensated compared to the traditional go to market? Thanks.

Sure. In terms of the -- can you please repeat the second part of the question?

How the channel partners are going to be compensated compared to your traditional approach.

Sure. So on the second one, there's going to be no difference in the channel compensation. They are going to be compensated the way they have been getting compensated. In terms of our go to market changes. It's more a train the trainer model, where we have our product and our overlay team. The channel overlay team, that channel overlay team will be responsible or have been training the AV Avaya salespeople and the ally channel. So that's the motion where we have been, we will be able to leverage their vast go to market capabilities.

Thank you. Our next question is coming from Mike Latimore from Northland Capital Markets. Your line is now live.

Thanks. Great quarter. How did average revenue per unified communications did end up in sort of fiscal 19 versus 18? Was it flat up down a little bit?

Yes, sure. So ARPU, has been staying very consistent, Mike, no discernible changes.

Thank you. Our next question is coming from Andrew King from Dougherty & Company. Your line is now live.

Andrew King on for Catharine Trebnick, thanks for taking my question. So Avaya's earnings call this morning, they've mentioned that originally ACO would only be released in the US, I want to get a little bit more color into what the next region does, it'd be launching into and two, what that timeline would look like? Thanks.

Sure, Andrew. So, for this year, there's a plan to roll out us initially and couple of countries internationally, which I would say if you let it all out, will be able to cover at least 60% to 70% of all the geo regions where the Avaya's presence is with the ACO product.

Thank you. We've reached the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.