Q3 2022 RingCentral Inc Earnings Call
[music].
Good day and welcome to the ring Central third quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touch 10000 to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to well work, bringing Central's Vice President of Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to ring Central third quarter 2022 earnings Conference call I'm will Wong ring Central Vice President of Investor Relations. Joining me today are Vlad just minutes standard Chairman and CEO Bill Katz about President and Chief operating officer, and suddenly Perak Chief Financial Officer, our format today.
Will include prepared remarks by Vlad Mo and suddenly followed by Q&A.
We also have a slide presentation available on our Investor Relations website that will coincide with todays call, which you can find out of the financial results section at IR that ring central Dot com.
Some of our discussions and responses to your questions will contain forward looking statements, including our fourth quarter and full year 2022 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties actual results may differ materially from our forward looking statements for a discussion of the risks and uncertainties related to our business.
And in our filings with the Securities and Exchange Commission and is incorporated by reference in today's discussion ring Central assumes no obligation and does not intend to update or comment on forward looking statements made on this call.
Otherwise indicated all measures that follow are non-GAAP with year over year comparisons a reconciliation of our GAAP to non-GAAP results is provided with our earnings release and in the slide deck.
Please visit our Investor Relations website to access our earnings release slide deck, our GAAP to non-GAAP reconciliations our periodic SEC reports a webcast replay of todays call and provide more about ring central 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 turn the call over to Vlad.
Good afternoon, and thank you for joining our third quarter earnings Conference call.
We had a solid quarter and exceeded our guidance on every key metric.
Total revenue.
$509 million.
That's up 23% versus last year and above our outlook of $502 million.
We achieved this result, despite an increasingly difficult macro environment.
While it is hard to predict the exact timing of an economic recovery, we're confident that rig central will continue playing a prominent role as businesses rationalize their spend and strive to be more efficient via digital transformation efforts.
We serve a mission critical need and provide customer value as they migrate from legacy systems to the cloud.
Additionally, we delivered a record quarterly operating profit margin of the Oregon and the half percent.
300 basis points versus last year.
This was significantly above our guidance.
Well <unk> percent.
Looking ahead I'm confident in our ability to deliver strong operating results, which include meaningfully expanded profitability.
So at this point, we're now targeting operating margin expansion, often at least 350 basis points in 2023.
This puts us on an accelerated path to achieving our prior commitment of at least a 20% operating margin.
No well.
Well, let me share the reasons why does central is winning in the Ucas market.
Sure will.
Because we believe we have the world's best cloud phone system.
Innovation is part of our DNA.
We will continue to make targeted investments in key growth areas, such as AI analytics and contact center and provide differentiated intelligent and connected experiences to our customers as they proceed with their digital transformations.
These investments will further add to what we believe is the most complete cloud PBX solution in the world with feature for every type of user and use case.
With over 8500, private and public applications and the ecosystem over 75000 developers, we enable customers to innovate on our platform.
This includes over 150 prebuilt telephony apps.
Over 330, prebuilt App for U C. S E T and the most advanced integrated contact center experience.
One integration example, salesforce.
Our integration less customers make and receive calls scheduled ring central video meetings and quickly assigned call disposition.
All without getting to lead sales force.
Customers are also able to make and low customer calls from anywhere in the world.
With advanced features such as offline and multiple logging that no. Other provider can cause users can save time, which they can always get to revenue generating activities.
This integration and the countless other integrations, we've developed including with Microsoft Google Service now top spot Zen desk, and others have helped us become an industry leader.
But that's not all.
Other key Differentiators include our outstanding 99.9, 99% reliability, which we achieved for the 17th consecutive quarter as well as our global reach with full availability in over 45 countries and presence in over.
800 countries.
We also support a wide range of endpoints, including from our strategic partners, such as Mitel, Avaya audits and Alcatel Lucent enterprise.
We also have a fully integrated IMS cloud architecture that enables fixed mobile convergence that is a key requirement from some of our GSP partners.
Second we win because of our unmatched partner ecosystem, which is made up of our strategic partners and multiple global service providers.
We have a proven ability to partner with the world's leading on premise PBX providers as well as the leading service providers, such as AT&T, BT, Dallas and Vodafone.
I'm also very pleased to announce our new upcoming relationship with charter communications.
We will be launching a joint offering for both SMB and enterprise businesses beyond the lookout for more details in the coming days.
And last but not least we have over 15003 seller spanning the globe.
We believe this gives us unrivaled access to the large market opportunity I've got the fuss.
Finally, we win because we're known as the leader in our industry.
We are proud to be a gartner magic quadrant for the unified communications as a service worldwide leader for seven years in a row with the loss recognition occurring in 2021.
Gardner also recognizing central for being ranked number one in all four use cases is it.
2021 Gardner critical capabilities for unified Communications as a service worldwide report updated August one.
2022.
Additionally, this quarter the dollar group, a leading global provider of testing and third party validation and certification conducted a feature by feature comparison of analytics capabilities in which were in central met tons of per cent of the specification criteria outlined in certain categories.
The next closest vendor only met tons per cent in four of the 13 categories.
Lastly, synergy research group recently recognized the ring central as the leader in Ucas.
With over 20% market share based on page six which is double the second and third place vendors.
Big picture is that voice remains as relevant as ever.
A good reminder of this is a recent survey of key technology purchase decision makers, which highlighted that 90% or business leaders preferred to use the phone over other communication tools.
This is true across companies of all sizes.
With use cases, ranging from internal calls and meetings to external client and vendor calls off note. We see this in our own customers as well as more than 95% of our base actively used phone.
We're just at the beginning of the journey.
There are 400 million telephony seats worldwide and many of those seats are expected to move to the cloud driven by a number of clearly visible mega trends.
These include the shift to hybrid work ongoing adoption of mobility businesses, increasing reliance on distributed Workforces and the desire for an integrated cloud based UC and cc solution from a single provider.
Synergy recently concluded that just when you want in Midland you see six are in the cloud today.
Or a single digit penetration rate.
This highlights how early we are in the journey when comparing to the number of seats that are still on prem and the yet to be migrated.
Looking forward, we will remain laser focused on delivering a best in class ucas offering by investing in innovation and driving profitable growth.
Throughout the year, we have taken steps to expand our operating margins and drive efficiencies throughout our business.
While the recently made the extremely difficult decision to further rationalize our workforce. We believe this will allow us to be more agile and better align our costs with our strategic priorities in the current macro environment.
This decision was not made lightly and we understand the impact this has on our people and their families.
We're taking meaningful action to help ease the transition for our impacted employees.
We want to underscore how grateful we are for their hard work and all their contributions.
Bring central would not be where we are today without them.
Finally, I want to reiterate how proud I am of what we as a company have accomplished.
Building from two guys in a garage. We're now at 2 billion dollar recurrent revenue business with leading share and an unrivaled platform.
I believe we're well positioned to emerge even stronger as it is.
Economic recovery begins.
Now, let me turn the call over to Malte.
Thanks flat Q3 results were solid as we continued to execute despite a more challenging economic backdrop, we had solid new deal activity highlighted by multiple 1 million dollar plus PCB wins. We also saw good activity from strategic partners and our contact center attach rate was.
Again over 60% for our large deals let me give you a few examples of our recent wins first a win at health comp with our newest strategic partner Mitel Health comp is one of the nations largest third party benefits administrators, they chose ring central to be their communications partner for both of you.
C N C C as part of their enterprise wide digital transformation, our integration with teams, which they currently use with key in helping US win. This deal. This is in addition to our leading voice and advanced effects SMS and integrated contact center capabilities, which teams does not offer.
Relative to our contact center help comp is now able to expand customer outreach to all channels, including voice chat email, social and 30, plus digital channels and importantly, we enabled health comp to save money by routing calls to the first available agent.
Which also reduced agent idle time, as well as by enabling them to utilize analytics to determine productivity opportunities. We continue to see customers like health called choose ring central due to our best in class integrated you cast and see Cas platform sell.
In the current environment cost savings are also an important catalyst in driving purchasing decisions. For example, a large fortune 500 company in the logistics sector with operations in over 50 countries selected Avaya cloud office by ring central to help them consolidate disparate systems.
It over many years multiple it teams were required to maintain these systems, which also ran on separate carriers, resulting in higher operating costs moving to ring central as cloud infrastructure will enable them to quickly replace outdated equipment and improved collaboration and communication all.
While showing an overall reduction in the total cost of ownership by 30%.
I also wanted to highlight a number of wins in the education sector, including a nearly 5000 seat win at the University of North Dakota, and then over 3000 seat win at a large Midwestern University. This continues the trend that we've seen in the last few quarters with many thousands of seats being added across school district.
And universities.
Now turning to our partners, our strategic channel and GSP partners also continued to be a key part of our go to market motion.
Both Mitel N Avaya again grew new seats sold quarter over quarter on the channel side, we saw a quarterly record number of leads generated and we expect those lease to translate into opportunities and sales over time also our channel partners continue to drive <unk>.
<unk> new deal activity and we're part of over 60% of our 1 million dollar plus T. C. V deals this quarter channel partners enjoy working with ring central because we offer flexible paths to the market depending on their business needs and individual customer use cases, while also providing tools and training to help them.
Seat regarding our GSP partners, we continue to see positive growth are beginning to ramp with Vodafone in Europe and as Vlad stated we're excited to begin working with charter.
And finally, we continue to invest in expanding sales internationally, we landed multiple $1 million plus T. C V deals outside the U S, including with Helios, one of Australia's leading health care companies and we expect more as we ramp in the coming quarters and years ahead.
Now let me provide you with an update on what we're seeing in the market today.
Leads pipeline and win rates remained strong and stable that said sales cycle times for our upmarket customers, which reverted to pre COVID-19 levels last quarter, a long gated incrementally in Q3 as customers required additional approvals before making purchase decisions. This also result.
<unk> and smaller initial purchases, we anticipate that this behavior will persist until the macro environment becomes less uncertain.
These factors along with the stronger dollar were headwinds to our business. This quarter of note overall churn has remained stable throughout the year and overall <unk> remains stable and over $30 suddenly will discuss in more detail. How these trends are impacting our near term financial outlook.
Looking forward the market remains large and Underpenetrated and we believe our leading product our ability to drive cost savings and unmatched partner ecosystem will continue to resonate with customers and importantly, our focus on profitable efficient growth puts us in a stronger position going forward.
To capture that opportunity.
To summarize we had a solid quarter. Despite the current macro environment, our leading product continues to differentiate us from others and our focus on execution and driving profitable growth sets us up well for the future now I'll pass it over to suddenly to discuss our financials and guidance.
Thanks now.
I will provide highlights from the third quarter, and then discuss our business outlook for the fourth quarter and full year.
I am very pleased with our Q3 results.
Which were above guidance across all key metrics.
Subscriptions revenue of 483 million was up 25% year over year and above our growth outlook of 23% to 24%.
On a constant currency basis.
Subscriptions revenue rose, 27% year over year.
Once again overall and new acquisition of RPM held steady.
Customers value our differentiated offering.
There's the primary doctor and the continued resilience of our RPM.
Subscription gross margins remain in the top tier of software peers, and we're again over 82%.
Moving to a R R.
Aric with 25% year over year to 2.05 billion.
On a constant currency basis.
<unk> grew 28%.
Given the recent strengthening of the dollar, particularly versus the British pound, which is our largest exposure.
Currency represented a 19 million dollar headwind this quarter relative to the second quarter.
As a reminder, we adjust our entire air our base using currency rates on the last day of each quarter.
Now moving to profitability.
Operating margin was a record 13, 5%.
300 basis points versus last year, and a full 100 basis points above our prior outlook.
This is the third consecutive quarter that we have solidly exceeded our operating profit margin outlook, which demonstrates our ability to execute on our strategy.
Driving efficient growth.
Our margin improvement was and will continue to be driven.
Four main leavers.
What we are seeing the benefits of operating leverage as we scale about $2 billion in recurring revenue.
Two.
We are prioritizing more efficient labor spend and taking further steps to improve the productivity of our workforce.
As Bob noted in his opening remarks.
We have made the extremely difficult decision to reduce our full time workforce by approximately 10% to ensure our cost base is aligned with our strategic priorities in the current environment.
Three we are rationalizing program spend such as marketing and lead generation activities to ensure they meet our hurdle rates.
As well as being judicious around all discretionary spend.
Four we are consolidating vendors to simplify our procurement process as well as drive savings across all functions.
Now moving to our balance sheet and cash flow.
We ended the quarter with 305 million of cash on hand.
This is inclusive of $20 million of shares repurchased during the quarter.
We generated free cash flow of 21 million in Q3.
The $88 million year to date.
Note that our free cash flow included one time cash outflows related to third party relocation efforts.
Patiency actions, we took in Q3.
Excluding these one time items, our year to date free cash flow would be $119 million or a margin of 8%.
During Q3, we recorded a 125 million noncash charge related to our Avaya prepaid commissions balance given their recent public disclosures.
Please refer to our third quarter Form 10-Q for additional details.
We will continue to monitor the avaya situation.
Financial actions accordingly.
As Matt noted the number of ACO seats that are biased toward continued to grow quarter over quarter.
Now turning to guidance.
This outlook is reflective of what we see in the market today.
No noted leads pipeline and win rates remained strong and stable.
Overall churn also remains stable.
However.
Cycle times for upmarket customers elongated incrementally in Q3 as customers required additional approvals before making purchase decisions.
This also resulted in smaller initial deployments.
While our SMB segment is proving to be resilient in the current climate.
We believe enterprise customers are being more cautious given the current economic landscape.
And we don't expect us to change in the near term.
Taking this into account for the fourth quarter, we expect.
Subscriptions revenue growth of 19% to 21%.
Adjusted for constant currency, we expect subscription revenue growth of 22% to 23%.
Total revenue growth of 17% to 18%.
Adjusted for constant currency, we expect total revenue growth of 19% to 20%.
non-GAAP operating margin of 14%, which reflects 350 basis points of year over year improvement.
And non-GAAP EPS of <unk> 59 to 60 cents.
Note our workforce reduction actions will result in GAAP only restructuring charges of 10 to 15 million related to employee severance and benefit costs.
Which we expect to incur in the next two quarters.
For the full year 2022, we are reiterating our subscriptions revenue growth outlook of 27% to 28%.
Adjusted for constant currency, we expect growth of 29%.
Additionally, we expect total revenue growth of 25% adjusted for constant currency, we expect growth of 26% to 27%.
Lastly, we are once again, raising our operating margin and EPS outlook.
We now expect full year non-GAAP operating margin of 12, 4% up from our prior outlook of 12%.
And non-GAAP EPS of $1 97 to $1.98.
Up from our prior range of $1 91 to $1 95.
Throughout 2022, we have shown our ability to consistently deliver strong and improving profitability.
At the start of the year, we guided to operating margins of 10, 6% for 2022.
We now expect operating margin of 12, 4% for the full year 2022 or up 220 basis points.
Further we plan to exit Q4, with an operating margin of 14%, which is up a full 350 basis points year over year.
Okay.
Looking ahead, we now expect operating margins to expand at least 350 basis points year over year in 2023.
Which accelerates our path to achieving our target of at least a 20% operating margin.
We expect to generate a significant amount of cash flow over the next few years.
This will provide us with increased flexibility as we look at capital allocation going forward, including our capacity to make strong ROI investments and increased optionality on addressing our March 2025 converts.
To summarize I am very proud of the quarter, we delivered.
<unk> central is well placed to navigate the current environment and we have the financial profile and flexibility to invest in the significant opportunity ahead of us.
While continuing to grow and expand profitability in a meaningful way.
With that let's open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time your question that's been addressed and he would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
And our first question will come from Kashering gone with Goldman Sachs. Please go ahead.
Hey, Thank you very much nice job on the operating leverage and good cost discipline here I'm curious to get your take on the retention trends among small businesses. That's been all played a bit of concern. If there is layoffs et cetera, which if it continues.
Continued support for bed Oh by the effect of the installed base not that that is what youre experiencing but I'm just curious to get your take on how you see.
The strength of the SMB ecosystem.
The installed base.
We appreciate the long sale cycles on the enterprise market is more concerned about the SMB side. That's it from me. Thank you so much.
Sure, Yes, hi lot here, a great great to have you on.
Fantastic question I'm glad you.
That was it.
Look I think many folks underestimate resiliency of Smbs.
And as you know you know we've been through cycles and diagnose recycles, we started out as an SMB company. We're now a multichannel multi segment so much wider exposure, but to your question Smbs are fine.
No.
We we are earlier in the quarter.
In the first month of the quarter, we saw some elevated fraud, not really chew on fraud, but everything has a stabilized and.
It seems to be steady as she goes for now I'll, let more provide more detail, but Ah I can tell you in these turbulent times I think that the wider your base the better it is my data.
Kash. Thanks for the question Yeah to answer the other part of it our overall net retention remained stable and above 100% and we're going to continue to monitor SMB for any signs of a slowdown, but as Larry said, it's showing resilience and even in terms of what we've seen so far in October is the smallest.
<unk> continues to be pretty resilient suddenly anything you'd like that yeah in cash. The other thing I'd. Just say is that certainly from a collections point of view, we've seen absolutely no impact in terms of the F&B base actually.
If anything collapse and stronger this quarter than in most recent quarters and and also no change to to bad debt expense on that count either.
Next question. Please operator, our next question will come from meta Marshall with Morgan Stanley . Please go ahead.
Oh, great. Thanks, you know I appreciate all of the guidance that you gave on 2023, just how should we think about growth in 'twenty two 'twenty three with kind of the operating leverage that you're planning on showing and then just how much of how you look at growth in 'twenty to 'twenty three is impacted by.
Macro versus kind of objective is to gain operating leverage thanks.
Yeah.
Okay.
Right.
Thanks me that.
Really appreciate the question so.
Clearly you did that I called out the operational leverage that we've guided to for 2023.
And as you know we don't typically guide.
At this point in Q3 for for next year.
What I would say just in terms of the the tradeoff you pointed to we don't really see it as a trade off where you feel like we can drive the operational leverage that's really inherent in a SaaS model. When you scale up to the size that we now are you know 2 billion plus of our recurring revenues.
In terms of the macro.
I mean, we did talk to certain trends that you're in his script and sales cycles elongate into sort of the levels, we saw pre COVID-19.
We are seeing heightened approvals and sometimes multiple approvals and certainly for our larger customers and some impact from smaller initial deployments on deal sizes and that did you know.
We incrementally worse Q3 on Q2.
We also have a bit of FX impact in the quarter and if you look ahead and you know we have a further a FX impact if you look at our Q4 guide it's about an additional one point of pressure on top line, but what I'd say is you know you've heard US talk this year about driving efficient growth and you know we did.
300 basis points of expansion in Q3.
We're now guiding to a further 350 basis point year over year in Q4.
And we've really tried to outline for you an accelerated path of getting to that at least 20% op margin that we alluded to last time.
We we are we posted earnings so our we've now laid out targets really are about 700 basis points of improvement over at say eight eight or so quarters.
And 2023 will be a further 350 basis point on top of where we ended.
Where we will end 2022, so I think really where we're getting.
Getting the benefits of scale and then we're also looking at all aspects of the business and been Super disciplined around those margin leavers that I called out in my script, you know, obviously I'm a lot more efficient around labor spend you did see that today, we made the extremely difficult decision.
To let 10% of our full time head count go.
And that obviously will have an impact and mainly in Q1 of next year, but we're really being disciplined on all aspects of the P&L.
And you know as we look to Q as we looked at 2023, we really expect to see that operational leverage kicking them on O P margin, Oh peak roads, and and you know.
Also fall fall to free cash flow as well so we don't really see it as a trade off we are driving efficient growth and that's the way forward.
Our next question will come from Ryan Macwilliams with Barclays. Please go ahead.
Yeah.
Thanks for taking the question then I would like to reiterate please see the improving margins suddenly what could the restructuring actions mean from a dollar perspective for next year or how you think about that thanks.
Yeah. Thanks for the question Ryan So I think in my script I was quite specific about the restructuring charge that we take as a result of the accident. So that's anywhere between 10 and $15 million.
Bobby.
Our GAAP only below the line charge associated with the restructuring in terms of how to think about you know the overall impact of the the head count action.
We've guided to 350 basis points of margin improvement for next year.
And I I said, just now to me that that you know, we'll see a significant uptick really in Q1 from those head count actions and what I would say is you know labor is.
Fairly strong are fairly big contributor to the overall margin improvement, but we're also going to post improvement in areas like sales and marketing rationalizing procurement spend you know there's a list of over 50 initiatives that we're working on now so the.
So that will really be very broad based across the P&L, but in terms of the head count accident, you should expect $10 million to $15 million of P&L charge.
And and then obviously the benefit will will go through from Q1 and increasingly throughout the year.
Our next question will come from Michael <unk> with Wells Fargo. Please go ahead.
Hey, great. Thanks, I appreciate you taking the question, but you've seen cycles before you founded this business in 1999.
Can you put some context around how your playbook changes it looks like there some quicker actions, you're making here the margin emphasis is clear, but anything else you'd point us and investors to you. That's informing your decision process here based on prior cycles. Thank you.
Sure sure.
Well to be clear.
Prior to 99, but whereas if I'm correct, if I'm wrong.
Tonight.
Look my general belief and understanding he is a cycles come and go seasons come and go and you.
You know eventually sanity prevails, we're obviously in a very different macro ring central.
Whereas a sizable player in a large market and we are obviously not immune okay got it.
You said that.
We have a very strong core belief that what we do matters.
We're solving a real need for many many hundreds of thousands of businesses.
And many millions of end users I believe.
We've shared our and user count of over 5 million that is the largest pure play in the industry a guy and he puts you guys at the broken but we do ask of actually paying users. So that's a major asset okay.
Anyone else can really both of that in our space.
So what are our priorities historically to make sure that our user base.
Continue to enjoy our services, including our absolutely unrivaled AR reliability five nines of reliability.
Unrivaled security yeah.
And of course, our different differentiated feature set where we simply just more boxes for more people than anyone else in our space.
Our number one priority.
Secondly, we believe that again this cycle will also and there will be another expansion, we wanted to be set up well for the goodness that will.
Undoubtedly calmer heads you know come to be at some point in time okay.
And we can discuss if it's next year or year. After about you know life will go on so what does this mean with with respect to your question.
We are absolutely going to continue our innovation.
Strategy and innovative efforts.
Ah the cutback that we've announced because largely spared our R&D.
The fourth okay.
And.
The areas that are interesting.
And above what I, just mentioned, which is keeping the lights on basically but there is a lot happening in AI. There is a lot happening in analytics. There is a lot happening in our platform. If you look through the prepared remarks, I think we specifically called out our largest.
Ucas developer ecosystem, Okay, which is both in terms of a number of software engineers, who have used our API, which is in the <unk>.
You know what did you say about 75000 of them as well as many hundreds of actually pre packaged apps and integrations sitting in our App Gallery. Those are all differentiators zoser, all strengths and we will be redoubling on those okay and.
So that's on the R&D side, I think I already mentioned, if not I'll repeat a deeper but are.
<unk> or a cloud phone system cloud contact center integration, Okay, that's definitely an area of.
Emphasis for us.
Luke on G T M.
And what life goes on a guy, we just announced a very very major.
Relationship with charter Communications charter is obviously one of the U S. A.
Leading.
Msp's gable gay.
Cable service providers, we could not be happier more proud with this we hope there is more to come for now up until now.
Have been quite successful I would say uniquely successful with a global service providers.
But that's basically youre telcos.
GBT Vodafone like that here its a major win in what is really.
You know next a Jason market. So we will continue those efforts, we will continue onboarding and enabling new resellers as well as we will continue in <unk>.
In addressing our you know the what is still a the juiciest market two yet go through digital transformation, which is 400 Oh.
Sorry 400 million.
On Prem PBX seats that are still sitting there on prem and with overall cloud market penetration in the 5% range about 20 million.
So we'll have our hands full and I'll tell you what it's great that we're just scale to.
$2 billion growing a profitable.
Turning to be to do much more serious visibility.
Sure.
Immediately certainly in 'twenty three and beyond.
We will be fine we'll survive this one come out stronger.
Our next question will come from Michael Funk with Bank of America. Please go ahead.
Yeah. Thanks for the questions Tonight. So I don't think the comment on the sales cycle was surprising I heard that quite a bit this quarter I did think that your your tone around funnel in the business in general is actually more constructive and we've heard.
There was this quarter from from other companies. So just wondering if your partner relationships, maybe are helping with the resiliency in your business and you've got some examples there of some wins that you're getting through the partner relationships.
Great question. Thank you much for it yeah as we called out we're very proud of our broad go to market approach, we're offering our customers multiple path to the cloud whether that's from the GSP community Vlad articulated charter joining that group, whether it's our var channel.
<unk> 15000, plus strong.
As well as our strategic partnerships with the legacy PBX on Prem providers and to your point, yeah, absolutely we've called out the multiple million dollar wins have come from those partnerships, we're continuing to work well across all three of those dimensions.
To address the cross segment.
Opportunity that exists in this extremely lowly penetrated market. Thanks for the question.
Our next question will come from Peter Levine with Evercore ISI. Please go ahead.
Yeah, Hi, guys. This is actually Peter Berkeley on for Peter Levine I appreciate you taking the questions here.
I'm just curious you know given our bias financial situation right now I'm curious if you could share any potential risk to the Hcl partnership and then maybe any contractual provisions do you have in place protecting that partnership from any change in control or restructure and you've got about it.
Yeah look I'll I'll take it as a high level up here.
Again mobile will of course detail.
But look at the car level, we have all kinds of contractual provisions in place.
But you know, we'll just have to see how a buyout proceeds and you know we are rooting for them to stay an independent company and to continue as a going concern.
You know as a reminder, there is still the world's largest shareholder on Prem seats. Both in U S. T. A guy that's that's the big thing there is still a very large company with something like doing the $5 billion in revenue and the sticky customer.
Very importantly for our relationship is the fact that they did not have a ucas offering ace.
Steel is there on the ucas offering.
And there are contractually barred from having another one and.
What happens you know it was a company moving forward.
You know, we know that for the last three years.
That they signed that exclusive arrangement was that they were not supposed to have been working with new guests and we have never been a you know we'll never showed that they were and they were just you know no rumblings stood up to that effect. So what this really means is that there are approximately 100 mill in <unk>.
Stalled seats, which is what they've been disclosing publicly.
Our largely still up for grabs and.
Our position is and the understanding is that while we would very much like for avaya to survive the difficulties and to continue under the current arrangement Budd.
In the unfortunate event that it does not appear to be he still doesn't change. The fact that those on prem customers need to go through the crowd ring central is still.
Disputed leader in unified Communications as a service.
And also the fact that through our multiple years of working closer with Avaya.
We believe we are in the best position to support our customer base.
Including the endpoints, where we believe we are in a very advantageous position given the work that they're already took place.
So that's that's where we're at on the via I can also mentioned that even through all of these well publicized difficulties of there's no tariffs would be clear, okay, but Q2, I'm, sorry, Q3 grew quarter over quarter over Q2, and Q2 grew quarter over quarter over Q1. So.
Oh there.
Glue the demand and.
Let's say, we're cautiously optimistic.
But I think you hit it all I mean, just to recap ACO seats that Avaya has.
To grow sequentially quarter over quarter for the last several quarters, where the only ucas provider that is compatible with Avaya endpoints.
<unk> is a bright spot for Avaya and there are tens of millions of seats out there and we have a right to win we.
Are the obvious choice for those customers as they're looking to migrate to the cloud at whatever point is appropriate for them. Thanks for the question.
Our next question will come from James Fish with Piper Sandler. Please go ahead.
Hey, guys. Thanks for the question.
Wanted to touch base on the Avaya prepaid commission write down.
What would prevent it from being the rest of the prepaid.
Commissions that are left there.
Could we see another further write down is really what I'm asking or did we actually worked.
Through that's a 375 now with the 125 write down.
Additionally.
I understand why you guys would be seeing a slowdown in the mid market SMB side, but why did enterprise as a segment here slowed as fastest this quarter. Thanks guys.
Thanks, I'll just take the first question on the Avaya, a noncash write down and then I'll hand over now to John on enterprise, So and in the quarter. We recorded a 125 million noncash charge related to me by a prepaid and that was as a result of their public disclosures and we felt it was prudent to do.
In the circumstances.
It doesn't in any way mean, we're stepping away from their commitment to us.
That's why I just outlined to you on a commercial basis, we actually saw more kept more seats this quarter versus last quarter and the quarter before so in terms of the commercial arrangement. We are still transparency is actually at an accelerated pace.
In terms of any further write down and it's really hard for me to give you any color on that apart from the fact that you know.
Like any other prepay or any other asset we will evaluate it.
Just on new information every quarter and do the impairment testing that we do and.
As we did in this case, so it's still not really much else to add there.
To pick up and hit on the second part of the question around the enterprise one thing to keep in mind is that.
Sequentially quarter over quarter, we did see about $20 million of FX hit which is predominantly in that enterprise space.
And then beyond that it's the reasons that I articulated during my prepared remarks, which is hey look while leads and pipe and win rates remained strong and stable we have.
One of the trends that I outlined in the second quarter.
Which is modestly elongated sales cycles are very much aligned with what we were seeing in pre COVID-19 as well as earlier.
Oh, I'm, sorry, smaller initial deployments in the enterprise space and look I mean, I think every company is resembling that remark right now like within ring Central We've recently changed our own purchase order process to give subtle suddenly and I, even more visibility in what's being approved and we're seeing that.
Same dynamic play out across the board due to the uncertain macro thanks.
Thanks for the question.
Our next question will come from city Pentagon heat with Mizuho. Please go ahead.
Hey, Thanks for taking my question I, just wanted to dig a little bit into the macro question, especially you talked about slowdown did you see towards the end of the quarter that slowdown and when they looked at enterprise growth deceleration and then you talked about Seltzer Languish and did you see any.
Deals that got slipped and do you expect that to close maybe in Q4.
Okay. So let me address both prongs of that.
Generally what we see is especially up market are more back end loaded quarter. I mean, that's been historically true and it's remained the elongated sales cycle additional approval of resolve the things that I just articulated certainly do play into deals that one might have expected to hit in <unk>.
One quarter roll into the next that's been true for both third quarter, and second quarter, and frankly unlikely to change and it's something that we factor in.
As we've got for fourth quarter, and something we will factor in as we go into 'twenty three as well.
Okay. Thank you very much.
Our next question will come from Matt <unk> with Deutsche Bank. Please go ahead.
Thank you for taking the question I know, we talked a little bit about avaya, but I'm just curious in terms of the partnership with nice any updates you can share in terms of how that's faring, whether you're seeing more success with cross sell there at the lower end or upper end of the market and then maybe secondly, I think suddenly you alluded to this but and I know we're several years, though.
But any initial thoughts you can share on how you're planning on addressing the roughly 1.65 billion in our upcoming 25 and 26 maturities.
Just given where rates are today. Thanks.
Okay I'll take the nice question, then turn it over to Tom Lee.
Your first and foremost I'll say.
We're seeing continued success in attaching.
Contact center to our largest deals.
Part of the prepared remarks, we talked about.
Continuing to see 60% plus of our largest deals having contact center attached and I really think that speaks to two things one is the.
Pretty amazing integrations will be built as part of our U S.
<unk> platform as well as the buying behavior that we're seeing in the market, where more and more especially mid March gone up customers wants to buy these two products together because it allows for a.
Our much improved end customer experiences at closing.
The employee experience by allowing integration of both customer facing employees and the ability to seamlessly transition.
Customers two back offices employees think of it as a contact center like technology, If you will and not really the power of the integrations that we've built and why we're continuing to see strong wins there with that let me turn it over to sung Lee to talk about the second quick question.
Thanks, Matt.
Thanks for the question, Matt and Yes of course, you know capital structure is always top of mind for a CFO .
And.
In terms of the actual convert themselves are as you quite rightly pointed out theyre not to you know the first one comes due over two years from now our March 2025, and the second one.
March 2026.
And what I would say is if you think about the financial profile that we outlined for you today and particularly around that expansion as O P margin.
Which will.
Also drive free cash flow expansion and you think about the optionality that that will give us in terms of how we decided to fund the business going forward.
It's really a picture of our strengthening financial profile.
Today, I'm really happy with that you know the converts because they you know we we we don't pay anything for them at zero percent interest.
But I feel like the flexibility we have to address them and only gets better and will only get better from where we are today. So thanks for the question.
Our next question will come from Tim Horan with Oppenheimer. Please go ahead.
Thanks, guys can you talk about the overall competitive and pricing environment are you seeing Microsoft or zoom or anyone else getting more aggressive or less aggressive.
Well thanks for the question Tim This is Mo what I'll tell you is as we said in our prepared remarks.
We are continuing to see overall ARPA is saying the strong and steady over $30. This has been a very consistent.
That we've given for three quarters in a row now and I think something that speaks to the resilience of this product set in the marketplace.
To the second half of your question.
Particularly did that our win rates have remained steady and strong as well. So when you think about those two things together what I would tell you is broadly know where we're not seeing it.
Any elevated levels of competition, that's resulting in deal loss or RP degradation. Thanks.
Thanks for the question.
Our next question will come from Brian Peterson with Raymond James. Please go ahead.
Alright, Thanks for taking the question I appreciate all the commentary, especially all the way out into 2023.
I just wanted to double click on what are your comments youre not alone in seeing sales cycles expand I'd love. If you could open up on that maybe a little bit more in terms of is that more on the net new side or has the expand motion with your enterprise customer base has that slowed down a bit as well.
Good question, what I'll tell you is that you know this modulate a bit quarter to quarter.
But essentially approximately 60%.
<unk> of our new bookings comes from acquisition and approximately 40% comes from net upsell. We're generally seeing those two things move together with no meaningful change over the last few quarters.
And so you know as you think about the trends that I articulated.
They're they're playing out.
Cross the board, whether it's a unused.
A new shift from on Prem to cloud or as people are thinking about spending incremental dollars.
Spending what they have today.
Thanks for the question.
Our last question will come from Matt Stotler with William Blair. Please go ahead.
Hey, Jim. Thank you for taking the question, we get a lot of inbounds from investors on your stock based comp as a percentage of revenue.
It had a increase there for some time into the well into the Twenty's and it seems like it should be coming down over the last several quarters I would love to just get an update on how you're how you're thinking about plans to continue reducing that and then where it ultimately you'd like that to.
To kind of settle out in terms of a percentage of revenue.
Thanks, I'll start and maybe want to add a comment or two but you're absolutely right. It is something that we have been focused on and.
If you think about where we're guiding for full year 'twenty two.
And you should see about a 400 basis point improvement in stock based comp as a percentage of revenue.
And the reason that the spend was elevated it is partly by virtue of you know when we gave out those granted it was at a much higher stock price.
It is something that we manage and evaluate as a management team and what I would say is it will continue to be one of the lever to be used to incentivize.
Incentivize our employees, we think it's really important for our employees to be aligned with with all of you all of the shareholders.
And and you know so so it is something that you continue to use but you should expect that number as a percentage of revenues over time to stabilize and you won't see as strong an improvement as you saw this year you know we made a big step change that over time and that should stabilize and then.
Secondly, just in terms of our SBC.
SBC the flip side of that is we also use buybacks at times and you saw this quarter in my prepared remarks that we did $25 million and $20 million of share buyback this quarter.
And you know that helped to offset the dilution as well. So I don't know if you have anything to add no. No I think you nailed it I mean coming into the year, we guided to about 200 basis points of improvement we.
We expect to be exiting the year closer to 400 basis points, which shows discipline that we've enacted.
Suddenly has talked about and to the second half of your question I do expect that to continue trending down over time, we have taken some operational actions this year, while continuing to use SBC as a.
Key retention and compensation tool, we have been able to take actions that over the next several years as new starts versus I would expect that to continue trending down into the into the teens range and then to sign a lease point stabilize that I'll call. It.
Staff levels then.
Thanks again for all the questions I'll turn it back over to the operator.
Thank you. This concludes our question and answer session. What you're also concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.