Good afternoon and welcome to the RingCentral Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Will Wong, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to RingCentral's fourth quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; and Sonalee Parekh, CFO. Our format today will include prepared remarks by Vlad and Sonalee, followed by Q&A. We also have a slide presentation available on our Investor Relations' website that will coincide with today's call, which you can find under the Financial Results section at ir.ringcentral.com. Some of our discussion and responses to your questions will contain forward-looking statements regarding the company's business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control, and are not guarantees of future performance. Actual results may differ materially from our forward-looking statements and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as today's earnings release. 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. 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. With that, I'll now turn the call over to Tarek.

Good afternoon and welcome to our fourth quarter 2023 earnings call. First, I'd like to welcome two new Board members, Ned Segal and Prat Bhatt, to the RingCentral family. Ned is a seasoned executive with more than 25 years of technology, finance, and capital markets experience including at Twitter, Intuit, and Goldman Sachs. Prat is an accomplished technology industry veteran and financial expert, having served as the Chief Accounting Officer at Cisco Systems for over twenty years. I look forward to working with them both. I also want to warmly thank Allan Thygesen for his nine years of service on our Board, as he will be transitioning off the Board in Q2. Now, moving to our results. We ended the year on a strong note. In Q4, total revenue rose 9%, above the midpoint of our guidance. ARR rose 11% to $2.3 billion. We also achieved record profitability, with quarterly operating margin of 20.5% and free cash flow of nearly $100 million, well above our outlook. Our strong finish to 2023 positions us well to execute on our strategy in 2024 and beyond. I returned as CEO to deliver on our strategy of; one, delivering durable growth and value from our core; two, expanding our TAM by turning RingCentral into a multi-product, AI-first communications leader. To that end, we have recently added three new products to our portfolio; RingCX, our native, AI-first contact center, RingSense for Sales, our conversation intelligence platform for sales professionals, and RingCentral Events, our new virtual, hybrid, and onsite events platform. And three, driving continued robust free cash flow generation, while materially reducing SBC, and maximizing free cash flow per share growth over the long-term. Our right to win is rooted in our industry leading, reliable, global, fully-featured business communication platform that now includes cloud PBX,…

Thanks Vlad. I'll now provide highlights from the fourth quarter and full year 2023, and then discuss our guidance for 2024. In Q4, subscription revenue of $547 million was up 9% year-over-year, above the midpoint of our guidance range. ARR of $2.33 billion was up 11% versus last year. Our Enterprise ARR grew 13% versus last year to $1 billion. We saw good traction in our $1 million plus TCV deals. We finished with a seasonally strong Q4, resulting in over 100 large deals for the year. Within SMB, ARR rose 9% versus last year, and mid-market ARR grew 10%, and we believe the demand environment has begun to stabilize. Moving to CCaaS. Once again, we saw more than 60% of our large, million dollar plus TCV deals include both UCaaS and CCaaS. CCaaS ARR now represents over $350 million of our total ARR base. Now, moving to profitability. I'll be referring to non-GAAP results, unless otherwise noted. Subscription gross margin was 82%, consistent with prior quarters. Overall ARPU was again above $30. Additionally, we are seeing good traction with our new products. We have already sold thousands of RingCX and RingSense for Sales seats at ARPUs that are higher than our corporate average, and expect new products to be accretive to ARPU and retention over time. Operating margin of 20.5%, above our guidance for 20.0%, rose 650 basis points versus last year. Our focus on increased efficiency and productivity and the significant operating leverage in our business continues to drive the meaningful increase in our profitability. Importantly, we generated quarterly adjusted, unlevered free cash flow of $97 million, a quarterly record. Moving to our balance sheet. In December, we repurchased $253 million nominal value of our 2025 convertible notes for approximately $240 million. During the quarter, we also repurchased…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Maybe Vlad, you could just speak to, given some of you stepping back into the CEO role, just whether there were any change in objectives between kind of different management that has been in the role over the last six months? And then maybe just on RingCX, clearly, you guys are seeing a lot of traction with new customers. Just any initiatives to sell that into the installed base? Or is that largely being sold to new customers today? Thanks.

Yes, hi Meta. Sure. ,So look, couple of new changes. Look, the new management, as you say, has been around for a few months. So, obviously, we're a large company and whatever momentum was carried into that period continued. But I would say that with me coming back and taking a fresh look at things, I think that you can expect a little bit more focus on technology and innovation. I think as you saw in the prepared remarks, there is renewed focus on becoming a multiproduct company and new product introduction. So, you can expect to hear the word product from me a little bit more often than maybe from the prior management here. And there is continual concentration and focus on profitability and profitable growth. So, that is not going to change. Another one is -- that I want to highlight is, I think there was some -- maybe confusion a few months ago about RingCentral, call it, retreating back into SMB. That is not what my plan is. RingCentral, our origins were indeed with SMB, but we've spent a better part of the last decade in expanding from SMB to an all-market company, including large enterprise. As you heard today, it is now a $1 billion business. It's not $1 billion -- it's not something that most people would walk away from and neither am I. And in particular, in the enterprise, it continues to be a growth vector for us. So, it grows faster than the company overall. And we are extremely pleased with the traction we're now getting within the Teams ecosystem. And as you -- I believe in prepared remarks, you've heard that we count 20% of Fortune 1000 amongst our enterprise customers. So, to be clear, it means that not you have 110 seats in a large company, but that these are $100,000-plus ARR deals, so these are real users and over half or I think, we're saying close to 60% of it are actually Teams users. So, this gives me really great hope that, that segment will continue to perform.

The next question is from Siti Panigrahi with Mizuho. Please go ahead.

Hi, thanks for taking my question. Sonalee, very impressive margin expansion and cash flow generation. But if I look at your topline growth now decelerating from 11% to now high single digit in 2024. So what needs to happen? Or is there a possibility for you to get back to this double-digit growth? And what are the key assumptions or driver for growth in this year that you embedded in your 2024 guidance? And what sort of conservatism baked into the guidance?

Yes, hi Siti. Firstly, thanks for your comments on profitability and free cash flow. And secondly, great question. I'm glad you asked it. On topline, I think it's really, really important for me to address it. We did take a deliberately conservative approach to the way we guide on revenue for this year because there is still some macro uncertainty out there. I mean, we're all seeing it. I think if you look across all the software companies that have reported up to now, and because of that uncertainty, we wanted to be prudent in the guide and what I would say is we're being very prudent. And I do believe strongly that we can drive back to double-digit growth. This is not an operation. This is something we can realize based on the very strong building blocks we have that are in place already today. You've heard from Vlad, but I'm going to talk about new products as well. Customer and analyst feedback we're receiving from our new products gives me a lot of confidence and our ability to scale these products to at least $100 million of ARR by the end of 2025. And that will have a very positive impact on our upsell, which you've heard me call out in the past have been impacted by the current macro environment. But as the macro improves, we do believe these will be important tailwinds, several percentage point tailwinds to our growth. So, together with the incremental growth from new products and the reacceleration from the core as a result of improved retention, we think that those are key catalysts to getting growth above the high single-digit or 9% that you talked about just now. In terms of margins, just one other point I want to make is that the margin expansion for 2024 that I've guided to, which is 200 basis points, it would have been higher. However, we've made some investments in the business in 2024 to drive growth in new products, including around demand gen and customer and channel incentivization. But also we have made a deliberate decision to shift a portion of our stock-based compensation to cash. So, both of those elements together resulted in about a 200 basis point headwind to operating margin. So, it would have been that much better in terms of the guide. And we expect to be able to continue to deliver annual margin expansion this year, next year and beyond that due to the operating leverage in the model.

The next question is from Terry Tillman with Truist Securities. Please go ahead.

Yes, thanks for that extra color there, Sonalee. Hi Vlad, Sonalee, and Will. Just my multipart single question is just first on the $100 million target for ARR at the end of 2025. I'm just kind of curious from here to there, I mean, are we talking like $25 million or $50 million in 2024? Just trying to understand how much of a steepness we're going to need into 2025? And then the second part of this question is on enterprise ARR, even with the conservatism, should we assume comfortable above 10% or maybe even low teens enterprise ARR growth? Thank you.

So, in terms of the actual $100 million target that we've set, I mean, we will certainly look for opportunities to give you milestone updates to that. But again, just leaving on the conservatism point, we feel like that is a very achievable number. And that will be mainly driven by RingCX. That will be the lion's share of it, but we think that we will continue to deliver across all the new products that we've introduced in the last quarter or so. And I think importantly, when we thought about our guidance, we decided to specifically be very conservative on the ramp for 2024. So expect to see much more of that to hit in 2025 and beyond. So, I'd say, really, Terry, like second half of 2024 and then certainly in 2025, very, very strong contribution.

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Thanks for taking the question. Great to see the year-over-year growth -- revenue growth implied in the first quarter, similar to the fourth quarter. So, where are we overall in terms of the macro? Like are you starting to see bookings conditions improve generally? And do you see any changes in linearity like the things get better at the end of the quarter? Thanks.

Yes. So, on linearity, great question. So, you've heard me the last couple of quarters talk about seeing bookings much more back-end loaded, and it was quite exaggerated in the last two quarters and particularly in that final month of the quarter. The way that we've guided for this year is really assuming no change to that linearity. So, that's more back-end loading. However, we have seen some stabilization in some of the macro trends that you've heard us call out in the last 12 to 18 months. And in particular, things like sales cycles, deal size, deployments, approvals, things like that. So, we do see a stabilization. We've certainly seen that stabilization continue into Q1 where we are as we stand now and the guidance today just assumes that continued stability.

Yes. And I just want to add to that a little bit. Look, bookings are actually pretty good. Bookings are strong. Given still a bit of instability in macro, upsell for us is a little bit more challenged. So, when we say bookings, I mean new logos and new business in particular. So, we are seeing strong demand there, okay? And that's really what we think would bode well for the future. Issue is a bit more with upsell and in certain cases down-sell. And this is just as businesses are rightsizing. But hopefully, as the economy recovers, this too will turn back into a tailwind. But as you can -- you saw from our press release and the releases and some of the prepared remarks, look, we continue signing up new logos and very important logos. And to make this comment, I went into how well our enterprise segment is doing. But our SMB segment, which is a $1.3 billion business, is also going pretty strong. So, I would say that it's certainly high -- far from being frothy. But I would say it's a general -- my general feeling is that things are healthy out there.

The next question is from Michael Funk with Bank of America. Please go ahead.

Hey, thank you for the question. One for Vlad, if I could. So, Vlad, improvement in playbook in a subscription-based model with slowing growth is to roll up smaller competitors and gain scale. Sonalee mentioned inorganic as a potential use of capital during her earlier remarks. So, in your view, what is the argument against rolling up smaller competitors to improve scale at RingCentral and potentially grow margin faster and your dominant market share position?

Yes. Look, so firstly, we are by no means averse to M&A. It has to make sense. We've highlighted our recent Hopin acquisition and how well it's doing for us. So, I would say that in the Hopin case, it will be more of an adjacency versus a competitor. I think that there are different ways to look at this. But by going after adjacencies, you're acquiring or buying into new TAMs and new SAMs. And it would be, we think -- deals like that would provide long-term tailwinds to the business as a whole and would set up well for long-term growth. As far as buying up competitors, look, there are many reasons to do it, such as various efficiencies that can be garnered. But then if we're talking about direct competitors, then it's a matter of what they do about the platforms, they run multiple platforms, do you move from one to the other? I think we have some relatively recent examples in the industry where even amongst our folks that -- one would say, would be in our space where these types of mergers yielded results that were a little bit mixed. So, you just need to be a little bit more careful. But certainly, at the right price, we would never say no. And I can tell you that we routinely look at numerous opportunities given our size and stability of our business. And very importantly, our most recent cash flow expansion in free cash and profitability, we do feel that we are a natural acquirer or natural consolidator. So, always on a lookout.

That was very helpful and certainly look forward to host you next week in Boston for the NDR. So, I look forward to seeing you then.

Same here. Thank you.

The next question is from Samad Samana with Jefferies. Please go ahead.

Good evening. Thanks for taking my questions. It's kind of a multiparter as well. So, on the new products, Vlad, big expansion of the portfolio. But they touch up against at least some of what your ISV partners also provide if I think about sales, events, how should we think about maybe where you fit into the ecosystem versus some of the companies that you partner with? And then certainly, just what are you assuming for UCaaS versus CCaaS versus other maybe as we think about 2024 ARR growth just because there has been kind of just big differences in the growth rates? Thanks to both of you.

Yes, hi Samad. Yes, look, no, great questions. Look, when you're saying some of the companies we partner with, I assume you're referring to RingCX vis-a-vis RingCentral Contact Center, which is hosted by NICE inContact. So, assuming I have the question right. Look, they are designed to address different segments of the market and different use cases. By and large, NICE inContact is a well-established enterprise leader. They are able to -- and have proven success in hosting multi-thousand seat contact centers with very complicated use cases. And they sell a very nice niche in the upper end of the market. So, we have this integration with them that's multiyear old. And it obviously has been quite successful for us and for them over the years and we stay committed to that relationship. Having said this, we clearly see an opportunity at the bottom end of the market as well as maybe even with some of the larger customers, but with simpler, more streamlined workflows. And this is where we saw an opportunity to come in with a differentiated product. That's simpler to use, simple to deploy, a lot more cost-effective. We truly are positioning it with disruptive pricing. And people are taking notice. And we are -- I think we mentioned we've doubled the number of logos in about three months. So, we're happy with that result. We already have some larger customers in the thousands of seats, frankly, that was a pleasant surprise for us, but success -- breeds success. And look, it's very early, but early signs are pretty positive. So, for now, we believe that the two will coexist.

So, Samad, just to answer your question about UCaaS/CCaaS bookings growth breakdown. So, firstly, you know we don't specifically guide on bookings and certainly not bookings or growth by product. But I can just give you a bit of color there. We do believe and certainly embedded in the guide and the comments I made earlier about we think we do see upside to where we're guiding. We believe we can grow faster than the market for each of these markets. So, when I talk about the market, I'm talking about third-party data where UCaaS is sort of mid-single. We think we could grow significantly above that. And then for CCaaS, I think the market, again, it's below 20% in terms of what third-party data is saying. And certainly, RingCX will be well above that. But overall, we believe we will grow faster than the market in both of those segments.

The next question is from Kash Rangan with Goldman Sachs. Please go ahead.

Yes. Vlad, you talked a lot about new products, et cetera. What does the new product direction of RingCentral look like over the next few years? Where do you see untapped opportunities for innovation that can get the company back to reaccelerating growth, as Sonalee pointed out? And it's always good to see founders being involved in the business. At this stage, it's good to have you back. But founders, I'm sure, you will agree more than anybody, Vlad, are not satisfied with the single-digit growth rate. I mean they're inherently growth people. So, how do we put that -- put your new product strategy in the context of your real aspirations for the company and what are the things that you could be doing differently in the next few years? Thank you so much.

Right. Yes. Look, so we are, I would say, at the early stages of executing on exactly the strategy that you've outlined. So, we are now -- and frankly, for what I remember, really maybe for the first time in our existence as a public company, we are now actively talking about NPIs, new product introductions, and about becoming a multiproduct company. I can tell you that it sounds simple, for sure, you have one product, what's another one to add. It is actually a big deal, okay, to go from a single product where you have a sales force trained to sell one particular solution, where you have product people who are specialists in one particular area and only that particular area, where your technology base only needs to address one use case, support, et cetera. So, everything now needs to be done several times over, which is a heavy lift. But we think that juice might be worth the squeeze here because it opens up new TAMs for us, largely expands our cumulative TAM. And very importantly, provides us with a new buyer personas. So, your addressable market increases as well in addition to the TAM increasing, okay? So, if you look at our just recent introductions, look, we've had -- we've reintroduced or introduced RingCX just last quarter, okay, and it already has over 100 logos. We have repackaged Events -- RingCentral Events, that was also last quarter, and we've announced a very major win -- we announced a very major win with Harvard today. That's a big deal. That was a head-to-head win against a very well-known and well-funded competitor, let's say, okay? So, we think that these are early signs of successes to come. If you think about it, the goalpost that we've set of…

The next question is from Ryan Koontz with Needham. Please go ahead.

Thanks for question. I want to ask about the competitive environment and the shift toward AI features and new products. And how are you seeing that shift impact the decision criteria of your customers and maybe just want to buy UCaaS or CCaaS you're seeing that on the forefront? And how is it changing the types of competitors you bump into, whether it's legacy player or maybe like Zoom or Dialpad that's more focused on AI? Thanks.

Yes. Well, look, I'll just speak about ourselves. I won't comment on what Zoom or Dialpad or anyone else is doing. I would maybe question a little bit saying that any of them are more concentrated on AI than we are. We do see ourselves as an AI-first company. RingCX, in particular, is leveraging our RingSense technology, which is our AI platform and that is having very good traction out there. Our growth is very much in my mind at least. My understanding is very much tied to specifically, it being an AI-first product, okay? And look, AI in a way is a great equalizer. With AI technologies, we can go against industry incumbents. And we don't need to replicate the entire feature set to be competitive just because the way that people approach, for example, customer service is radically changing with availability of LLMs and IVAs and just as a game shift from, hey, let's empower or power up more agents versus let's handle more transactions at quality, but save companies money by letting them reduce their contact center staff. So, we think that for RingCX, in particular, it would be a great tailwind. Same for Events, okay, which is the two products we're highlighting. Again, it is absolutely ripe for AI innovation. And we'll have a lot more to say about both of these and some more at Enterprise Connect, which is coming up next year. Now, as far as our core product is concerned, look, when all is said and done, why do people buy RingCentral given the other options in the market? And the answer is to me at least, is relatively straightforward. So, as they buy us A, because we're stable, we're always up. We have five to 6.9s [ph] availability for many years and…

The final question today is from Brian Peterson with Raymond James. Please go ahead.

Thanks and nice job on the free cash flow ramp this quarter. Sonalee, I appreciate all the color on the demand environment. But let me hear about what's going on at the top of the funnel. How has that trended? Any notable changes in mix there via a partner versus direct or enterprise new products, would love to get any perspective there? Thanks guys.

Yes, sure. Thanks for the kind words on free cash flow. So, in terms of what we're seeing in the demand environment, I would say there's not a really big change to call out. One thing that I would just comment on is we did see a stabilization in SMB. We saw strong trends from the enterprise side of the house. And we don't really tend to give you much more breakdown in terms of segments or what we're seeing from the segments. But in terms of how the guidance is reflecting what we're seeing, it's assuming this continued stabilization, so no real improvement. So, if we were to see an improvement, for example, in the upsell environment or if we were to see traction from some of the steps we're taking around churn to improve net retention, then that would be upside in terms of what we've laid out to you today. The other thing I just want to say before we conclude the call, Vlad and I and the senior management team are extremely focused on SBC. And hopefully, you saw that in the way that I guided there's meaningful, meaningful reductions in 2024. So, we're guiding to 16% coming down from 20%. But we're not going to stop there. Net new grants for 2024 will be down by approximately 50%. but we will continue on our drive to bring that down and you should expect further several hundred basis point improvement as you look forward to 2025. This is something that we take very seriously and thanks for calling out the free cash flow and mentioning the free cash flow, but we care about free cash flow per share. And hopefully, you will have noted that the free cash flow per share growth that we will deliver for you in 2024 is 25% year-over-year growth. So, I look forward to spending more time with all of you in the conferences coming up over the next several weeks. But just wanted to be sure that, that point was taken home.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.