Q4 2022 RingCentral Inc Earnings Call
Good afternoon, and welcome to the ring Central fourth quarter 2022 earnings conference call.
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Please note this event is being recorded.
I'd now like to turn the conference over to will Wong. Please go ahead.
Thank you good afternoon, and welcome to ring Central fourth quarter, and full year 2022 earnings conference call I'm, well Wong VP of Investor Relations. Joining me today are Vlad Schmitz founder Chairman and CEO , No cat about President and Chief operating officer, and suddenly Parex Chief Financial Officer, our format today will include.
Prepared remarks, I've lives now 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 under the financial results section at IR Dot ring Central Dot 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. They 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 is what I would say its earnings release.
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.
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 flat.
Thanks will.
Good afternoon, and thank you for joining our fourth quarter earnings Conference call.
2022 was a milestone year for ring central.
I'm very proud of what our team has achieved against a challenging macroeconomic backdrop.
The strength and resilience of our business model and stickiness of our customer base allowed us to once again delivered on our guidance.
Well, let me give you a few facts regarding 2022.
One we.
We finished the year with $2.1 billion and recurring revenue.
We're now one of only 10 pure play <unk> companies with over $2 billion of recurring revenue and greater than 80% subscription gross margin.
Do we.
We exited the year with a record operating margin of 14%, which is up over 300 basis points versus last year.
Three contact center is now approximately a 300 million dollar era business, which we believe makes us a top five global <unk> provider.
And for most importantly, we still invested over a quarter billion dollars in product and technology further cementing our market leadership position.
And going from strength to strength.
When do you want you to ring central received over 30 workplace and employer brand awards.
We were honored to be included among best companies for diversity women and company culture.
This allowed us to build a world class team as we attracted top notch senior executives from companies such as Google Adobe AWS, Nvidia and five nines.
Building on this solid foundation, we expect continued growth and improving customer acquisition costs, resulting in strong operating margin expansion.
We have also made significant progress driving down SBC as a percent of revenue by almost 400 basis points in 2022.
And we expect continued improvement in this area going forward.
All of this puts us on a path to significantly stronger free cash flows, which combined with our new credit facility puts us well on our way towards addressing our outstanding converts.
Marlin suddenly will provide more detail about our results and outlook shortly.
But before they do let me remind you of the main drivers of our success.
It comes down to our corporate values Trust innovation and partnerships.
Fourth truck.
Q4 marked the 18th consecutive quarter of 99.9, 99% uptime.
Reliability, you've opened the single most important factor for customers as our service is mission critical to them.
They select rig central because we can be trusted to connect them with anyone anywhere and anytime.
This continues to be a positive differentiator for us in our industry.
And we see it in our base.
With over 95% of our customers actively using green central for both internal and external communications and with billions of API calls each month.
Russ Olsen means data privacy and security.
This quarter, we expanded end to end encryption beyond support for a bit here.
Now includes message it can phone, giving customers the ability to keep critical information safe.
Privacy and security are top priorities and we will continue to invest to maintain our leadership in this important area given its criticality to our customers.
Second innovation.
Ring Central was built on the duals Mega trends of mobility, and distributed Workforces, which will leverage to improve the effectiveness of communications for enterprises worldwide.
And now there is a new mega trend emerging that is potentially even more disruptive, namely AI.
While the bar of large language model AI has recently captured the imagination of the broader public we are proud to have been one of the first in our industry to deploy these types of solutions.
We're leveraging AI to make real time communications more intelligent seamless and effective.
Lloyds reduction as a consideration virtual backgrounds meeting transcriptions summary, and highlights are just a few examples of how we use AI to enhance our users' experiences and productivity.
Moving forward, we will continue to invest in AI across to our portfolio.
You will see us launch a new product that leverage AI to improve efficiency of collaboration for knowledge workers improves the efficacy of our contact center for agents and supervisors and improve the productivity.
For frontline workers.
We expect these investments will cement our leadership position in the age of AI.
Stay tuned for exciting new product announcements throughout 'twenty to 'twenty three.
Outside of AI, We've added Congress of features to our platform in 'twenty to 'twenty two.
These include delivery on our adverse EU data privacy requirements.
Ray Bomb Act compliance.
Browser support from Firefox.
Enablement of GSP partners, like Vodafone and charter that introduction of device as a service.
<unk> unique integrations for ring Central contact center.
Revamped resource center.
60, plus new integrations into key third party tools to simplify customer workflows.
And expansion to additional digital customer engagement channels.
Lincoln for example.
And finally partnerships, we're committed to our strategy of partnering with the worlds most recognizable brands to create additional value for businesses and enterprises worldwide.
Our partnerships with companies like H H E B T Vodafone and the number of others are unique and it's got to be a meaningful driver of our success.
Partnerships remain an important part of our strategy.
Mobile Doubleclick, but let me share coppel, a visa skylights.
Sure well launching a new partnership with AWS.
This announcement marks the beginning of an important new relationship whereby we will work together with AWS.
New delivery technologies and innovations that improve business communications for today's hybrid workforce.
Under this new multiyear strategic agreement ring Central and AWS will directly sell our product and customers will be able to directly purchase bring central N V B and contact center solutions from the AWS marketplace.
In addition, ring central and AWS will work together to develop and deliver vertical solutions for businesses in core industries, such as health care financial services retail education, and public sector as well as invest in joint marketing lead generation.
Asian and promotion activities together.
We are extremely excited about this new strategic relationship and cannot wait to get started.
Also yesterday, we announced an extended and expanded the agreement to our strategic partnership with Avaya with significantly improved terms.
Avaya cloud office by ring Central remains advice exclusive multi tenant UK solution to our customers.
Why it continues to hold the worlds largest base of unified communications on Prem users and we remain best position to migrate to this base to the cloud.
Looking ahead, there are hundreds of millions of on Prem seats that are still to be migrated and where we have the right to win everyday.
There is tremendous product market fit.
And we have the product.
Partnerships and most importantly people to capture this large untapped opportunity that is still in front of us.
With that let me turn the call over tomorrow to discuss in more detail, what we're seeing in the market today.
Thanks flat, we continue to execute well and delivered solid results in the current environment upmarket New logo acquisition was robust.
Also our net retention rate in Q4 was again over 100% demonstrating our ability to both land and expand and driven in part by continued strength within our contact center, which grew above the company average.
Our contact center brings together, the world's leading UC and Cc and the latest 20 twenty-two Gartner critical capabilities for unified Communications as a service worldwide report ring Central ranked first in the U C with integrated contact Center use case ahead of 11 other vendors.
And the reason why is tightly integrated functionality the benefits customers of all sizes with a unique differentiated experiences.
First for agents are integrated solution offer seamless access to other non contact center are poised across the business and the ability to share simple context for the interaction.
And two for Supervisors, our performance management solution contact Center pulse provides real time alerts on agent performance Kpis using our messaging technology. This allows supervisors to react to changing interaction volumes and agent performance instantly our customers also.
And end to end experience with seamless billing faster implementation and integrated support.
As Vlad mentioned there are hundreds of millions of seats in the verticals and geographies that we are actively selling in today. We are mission critical to industries, such as health care financial services retail education, and professional services, where our real time customer interaction is SM.
So to the ability to operate.
For example, Aspen dental one of the largest dental service organizations in the U S community Health plan of Washington, and Visa Health, where all million dollar plus T. C V healthcare wins this quarter, they selected ring central because we address key priorities for them such as HIPAA compliance.
Increasing staff efficiency and patient engagement and of course, reducing care coordination friction.
Our differentiation is clearly a driving factor in helping us win not just in health care, but also within the teens ecosystem. We're successful with teams users because of our unmatched and mission critical capabilities.
First we offer five nines of uptime Native P. S. T N to over 45 countries and out of the box analytics and reporting second we also have numerous deep integrations into both our contact center solution as well as leading technology applications, such as Google Salesforce and service.
Now and third we enable native SMS and vertical specific capabilities and integrations that many of our core customers need to do their job.
This has resulted in triple digit growth in the fourth quarter and increasing penetration of the team's base. We continue to see this as an opportunity for future growth.
Now moving onto partnerships.
On Avaya, we're pleased with the new extended and expanded agreement, which now includes minimum see commitments and a better aligned incentive structure intended to drive accelerated migration to Avaya cloud office, we expect to see renewed focus in selling ACO after avaya.
Finalizes their recapitalization, we expect that avaya will emerge stronger and better positioned to migrate the world's largest on premises install base to Avaya cloud office by ring Central the best you cast destination for every Avaya unified communications customer regarding Mitel, we can.
To see strong traction since we entered into our strategic partnership in November of 2021 with sequential growth in UC sales every quarter of 2022.
In addition to our strategic partners our channel N GSP partners continue to be integral to our success, providing us with broad distribution and helping us expand our addressable customer base.
Leads generated by our channel partners increased over 30% year over year in Q4 channel partners continue to pick ring central because of our leading product and the ease of working with us.
Our GSP partners continue to drive stable growth and we look forward to the continued ramp of new partners, such as charter and Vodafone.
On international we continue to gain traction with almost triple the number of million dollar plus T. C V deals in Q4 versus the prior year.
Now turning to what we're seeing in the field.
Our Q4 pipeline was up versus last year, and our win rates continue to be steady and strong. However, the conversion of these opportunities continues to be impacted by the current macro environment cycle times remain elongated versus last year with initial deployment sizes down both year over year and versus <unk>.
Q3.
Customers continue to understand how we are able to save them money, while also enhancing the communications channels, but in this environment timing and deal size remain headwinds.
Well, we can't control is being more efficient in our go to market activities sales and marketing expense as a percentage of revenue demonstrated solid year over year improvement in Q4, and there's more to come as the impact of the efficiency actions. We took in 2022 will be fully realized this year.
We have also executed on additional actions to make our go to market more efficient going forward. This includes one evolving our partnerships to improve overall economics for all parties to reducing support functions in cells, while investing in frontline sales capacity three.
Lowering upfront commissions costs across our partners and direct sellers, while also allowing top performers to earn more and for continuing to be disciplined on marketing spend which thus far has yielded better leads with improved conversion rates and at a lower cost.
In summary, we continue to execute well in the current environment, our ability to help customers save money, while increasing their efficiency has not changed we are continuing to look at all aspects of our go to market to ensure we are as efficient as possible for when macro conditions improve setting us up well.
For more profitable growth going forward now I'll pass it over to suddenly to discuss our financials and business outlook.
Thanks, Matt.
Before I discuss our performance in 2023 outlook I wanted to reflect on what we achieved in 2022.
As Bob said, we are among a select group of SaaS company with over $2 billion in Ela and subscription gross margins of over 80%.
We clearly demonstrated the power of our business model at scale as we solidly exceeded our profitability goals in 2022.
I don't think dynamic and challenging macro backdrop.
We are a significantly more profitable company as we enter 2023.
Now turning to our Q4 performance.
Subscriptions revenue of 502 million was up 19% year over year and in line with our guidance range.
On a constant currency basis subscription revenue rose, 21% year over year.
ARPA was once again stable across both Ucas and CCAR with overall, our new acquisition of RPM holding study about $30.
Importantly, new customer ARPA is being generated at more attractive unit economics as customer acquisition cost improve.
Moving to profitability.
Our non-GAAP operating margin of 14%.
Another quarterly record and was up over 300 basis points year over year driven.
Driven by efficiencies generated across the business, most notably in sales and marketing.
Now moving to full year 'twenty two.
Subscription revenue of 1.89 billion was up 27% year over year.
On a constant currency basis subscriptions revenues rose, 29% year over year.
Total revenue of $1 99 billion was up 25% year over year.
On a constant currency basis total revenue rose 26%.
Our ability to deliver a clearly differentiated product that is highly valued by our sticky customer.
Can use to generate industry, leading subscription gross margin, which came in at 82, 4% in 2022.
Moving to a R R.
We delivered $2 $1 billion of error.
Up 17% year over year, and 19% on a constant currency basis.
Our C cat business now represents approximately $300 million of era.
Going forward, we will provide updates on our C cap error on a semi annual basis.
The next update in Q2 'twenty three.
We have also set the foundation for expanding profitability.
In 2022, our operating profit dollars rose over 50% year over year.
Which resulted in an operating profit margin of 12, 4% up 220 basis point year over year with more to come.
Now turning to our balance sheet.
We ended 2022 with cash of $270 million.
This is inclusive of 55 million of shares repurchased in Q4.
The full year total to approximately $100 million.
Today, we are announcing a new board approved share repurchase authorization for 175 million through December 31st 2023.
Moving to free cash flow.
As is typical in our industry.
Any differences between commissions and customer payments.
And the Delta between operating margin and free cash flow margin.
Our free cash flow margin over a 12 month period, typically 12, our non-GAAP operating margin by five to six points.
These upfront commissions are investments that resulted in very attractive ROI over the life of the customer.
For the full year 2022 we generated free cash flow of $75 million or a margin of 4%.
This includes a roughly three point impact from items related to restructuring third party relocation costs renegotiating terms with vendors and the linearity of vendor payments.
Our disciplined approach to driving productivity and efficiency across the business will result in meaningful free cash flow expansion in 'twenty, two 'twenty three and beyond.
We are targeting robust free cash flow growth and twenty-three with normalized unlevered free cash flow doubling over the next two years 2022 to 'twenty 'twenty four.
The free cash flow growth, we project provides us with the flexibility to invest for growth.
Address our converts and return capital to our shareholders.
On that point I'm excited to announce that we have entered into a five year $600 million credit facility, consisting of a 400 million delayed draw term loan.
A 200 million dollar revolver with bank of America, and J P. Morgan acting as joint lead Arrangers and book runners and Wells Fargo as joint book runner.
Use of proceeds from the revolver and term loan and.
Or for general corporate purposes, including the retiring of convertible debt if market conditions present, an attractive opportunity to do so.
Term loan may be drawn at any time over the next nine months.
We saw very strong demand for the facility and had strong participation from leading financial institutions.
Which is a testament to our strengthening financial profile.
Strategy of driving efficient growth.
Free cash flow generation and focus on disciplined capital management.
Now turning to guidance.
Outlook is reflective of what we see in the market today.
It does not assume any improvement to current macro conditions.
Taking this into account.
For the first quarter of 2023, we expect.
Subscriptions revenue growth of 14% to 15%.
Total revenue growth of 12% to 13%.
non-GAAP operating margin of 16, 5%.
And non-GAAP EPS of <unk> 69 to 70 cents.
For the full year 2023, we expect steps.
Subscriptions revenue growth of 10% to 11%.
Total revenue growth of 10% to 11%.
non-GAAP operating profit margin of at least 18%.
Up at least 560 basis points versus last year.
Based on the midpoint of our revenue guidance, we expect operating profit dollars to grow at least 60%.
And non-GAAP EPS of $3 and four to $3.10.
As we look forward, we will be disciplined and protecting our RPM well managing our cost structure as we drive durable growth and expanding operating profit margins.
Our operating margin improvement will be driven by four main factors.
One operating leverage as we continue to scale above $2 billion in recurring revenue.
Two more efficient labor spend and improving the productivity of our workforce.
This included stock based compensation, which we expect to further improve as a percentage of revenue by more than 100 basis points year over year and 2023.
And almost 400 basis point improvement in 2022.
We believe this trend will continue beyond 'twenty three given one our discipline on labor also applies to stock based compensation and two the impact of issuing shares at historical prices.
We are committed to driving SBC as a percentage of revenue meaningfully lower over the next two years.
Three a multiyear go to market transformation to further improve sales and marketing productivity and partner economics, which will lower the cost of acquiring new customers.
For the.
Vendor rationalization, which will drive meaningful procurement savings.
These leavers are key.
We drive towards continued significant margin expansion and growing free cash flow.
In summary, 2022, it was a year of solid execution, despite a difficult macro backdrop.
In 'twenty to 'twenty, three we will deliver healthy growth and drive greater efficiency within the business.
Two quarters ago, we reiterated our commitment to achieving at least a 20% operating margin.
Since then we have hit major milestones in the path to achieving this goal.
To this end we are proud to announce that we expect to exit 'twenty to 'twenty three with at least a 20% operating profit margin.
We have built a strong foundation and we remain laser focused on delivering value to our stakeholders.
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 telephone keypad if.
If you were using a speakerphone please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two.
Our first question comes from Samad Samana with Jefferies. Please go ahead.
Hey, good evening and and thanks for taking my questions I guess, maybe first one certainly for you I. Appreciate the you did the enhanced disclosures and all the detail around the the leverage I guess, just when I think about capital management strategy. Overall now that you have the facility to take care of the converts how should we think about it.
Between the buyback and other ways of using the free cash flow, but how should we think about using that over the next 12 months and then redeploying that and is there room for that free cash flow conversion to improve now that some of the prepaid commissions that you previously had a better structure with your partnerships.
Yeah. Thanks for the question so hard and yeah. We are very very excited about.
The credit facility that we announced today. So that's a 200 million term loan and 400 million and 200 million of another 400 million term loan.
And what I would say is our revenue and profitability profile that we outlined for you really allows us to consider all forms of financing so not yet convertible debt market.
And we believe that the term loan a really provides us the best option to retire a portion of our convertible debt.
And reduce those maturities if market conditions presents an attractive opportunity for us to do so.
And I would say the terms were very attractive and demand for that transaction was very strong.
We have no immediate plan to retire the converts but we'll be watching the market closely and make a decision on whether to draw on that term loan a or not over the next nine months or so.
But within that we plan to grow EBITDA significantly over the next few years and that will drive down our leverage multiple significantly and again presents us with a lot of optionality in terms of how we refinance convertibles, how we decide to invest in our own organic growth and then as <unk>.
You say share buybacks, so I really view our capital allocation policy is dynamic and it will take all three forms but.
But at the moment, we are as you know very firmly focused on driving margin improvement and also free cash flow and in terms of the relationship between the two you heard in my prepared remarks, we're expecting free cash flow to double over the period of 'twenty two to 'twenty. Four however, you still will see about.
Five point Delta between O P margin and free cash flow as is the case and as typical with many fast as I said in terms of the renegotiation of the partnership that is helpful. In terms of driving margin, but it wouldnt make a significant enough difference in terms of really narrowing that delta.
For now I would say for modeling purposes expect that delta to continue between Ob margin and free cash so hopefully that answers your question it.
It does and then I have a follow up and this could really be for any of you all but just as I think about where a R. R. N did and then the guidance for 2023 for it it kind of suggests that subscription revenue in 'twenty three you'll end up being about where are our ended in 2022 I'm just curious how how should we think about that is there.
Unexpected uptick in churn in the base or is there a combination of maybe expected churn versus some offsetting slower new business just how do we reconcile where the business ended in the fourth quarter, and then that Ford subscription revenue and it doesn't have to be on the math itself, but just maybe how is the company thinking about the business between those two different.
Thanks.
Yeah. So why don't I start and then I may hand over to Mike for some comments around the business.
We don't typically guide to <unk>, but let me provide some color given your question. So we are adding net new bookings at a healthy rate and we will in 2023.
We've shown you a revenue guide of 10% to 11% for 2023 and that does factor in new bookings and what I would say directionally, we would expect a or our growth for 'twenty three to be above where we guided for total revenue growth in 'twenty three and some of it puts and takes there R. S.
We are now growing more up market and also given the current macro we've assumed more backend loaded bookings.
And you know we're being more conservative in terms of what we're forecasting on churn in downtown in the current environment as is prudent and as our base gets larger obviously that churn number even if it's stable as a percentage it gets larger as well, but I think the most important thing from your perspective is that <unk>.
Our growth, we would expect it directionally it could be above our total revenue growth for them.
Really helpful. I'll hop back in the queue, but great to see all the progress on the margin expansion. Thanks, guys. Thanks a lot.
The next question is from Sterling Auty with S. V. B. Please go ahead.
Yeah. Thanks, Hi, guys I wanted to ask two questions on the extension with a by a the first one is opening up the ability for them to sell direct or kind of in a wholesale message how does that impact the amount of revenue per seat that you get a which I would imagine gets diminished but on the flip side can you talk.
About the benefit that I imagine you get at the operating margin contribution level.
Thanks for the question Yeah, we're very excited about the new agreement with Avaya.
We expect them as part of the recapitalization to emerge stronger and be focused on selling Avaya cloud office as one of their key offerings into the market as you say one of the key reasons why we're excited is because one we now have minimum seed commitments.
As part of the arrangement and two as.
As we think about the product work, we're doing and the new go to market motions that were introducing including their ability to sell direct.
There is a lot more incentive for them to actively go look at their existing the world's largest base of on premise seats and move them to the cloud relative to the economics, we expect that the economics of them selling direct is actually accretive to the current economics that we're getting from them and then it seems.
It becomes a function of what volumes, we should be expecting a minimum commits or potentially something larger in the coming quarters and years.
So hopefully that answers your question.
It does just one follow up would.
It would be is that accretion at the revenue line, the EBIT loss or bolt and on the guaranteed minimums you know, it's a company it's coming through a packaged bankruptcy you know what's kind of the I guess, the the handcuffs are the feet to the fire.
That get those minimums paid.
Yeah.
Great question. So what I would tell you is yes for sure on the EBIT Slash contribution margin side. It's.
Very much accretive as you think about revenue it really becomes a function of the volumes that are sold.
In a direct motion, yes, there is less top line, but to the degree that they have the worlds largest space and are able to actively monetize that base then it could certainly be accretive on the top line as well.
And then the final piece of your question, we're comfortable that the contractual provisions that we have in place will allow us to achieve.
Achieve the minimum commitment volumes and to the degree that we're not able to achieve those then there's mechanisms in place to address that as well.
The next question is from Kash Rangan with Goldman Sachs. Please go ahead.
Hi, very nice to see all of the operational improvements it looks like you're getting super razor focused on all kinds of levers topline expenses et cetera could you get to see that one for you on AWS, So maybe more.
Two of your whoever wants to talk about it what are the specific segments of the market that you think you can address with this AWS partnership that you could previously not address and how does this work will AWS salespeople get compensated well there'll be commission sharing between the two.
And how are you gonna be uncovering the lead pipeline with respect to generating this business and as a follow up as a result of that how much of the AWS.
Partnership is in your guidance, because if I do some rough math I look at the net new subscription implied by your guidance. It. It's a decline of about 40, or 50%, which I guess is consistent with how the fourth quarter pans out but are you really seeing our new business activity in the months of Jan.
Annually in February following the trend all things are looking a little bit better, but you don't want to get ahead of yourself. Thank you so much.
Hi, Kash below tier yeah, no. Thanks for the compliment here are looking.
Let me take the first part of the first questions Lisa.
Luke.
It's obviously early with AWS with just announced but it seems for now that it.
It will be skewing more upmarket more enterprise. This is where are there. Our sales forces are you know most active anyway I can tell you that where we're already seeing good deal flow or this is a deal has been in the works for quite some diamonds companies have already begun working together.
Sure.
We know that I think in our prepared remarks that our our our entire portfolio will also be available in the marketplace. So we expect this to be a you know a more more inclusive, but as far as our direct sales efforts again.
I would see a more more upmarket.
Concentration and more maybe you can take the second part of the question absolutely. So it cashes to build on that yeah. We're we're very excited about the AWS opportunity.
Considering how new it is that is not currently in our guidance a.
B, what's really something that has gotten us interested in this one is the two there are sellers will be compensated and be able to retire quota by selling our unified communications as a service product.
And then there is no commissions back to them. If you will which was a part of your question. Then I think the final thing that you asked was what are we seeing in terms of so far in <unk> and the trends that we're seeing in <unk> are consistent with what we saw in <unk> overall.
So I believe we answered your multifaceted question, but if there was anything we missed please let us know.
The next question is from meta Marshall with Morgan Stanley . Please go ahead.
Great. Thanks, you know understanding you're kind of putting in some conservatism in your outlook, but just if you could give a sense of you know how much of that conservatism was due to the environment that you're seeing versus maybe the cuts that you've made in this meeting to see kind of how efficiency.
Change is given some of those cuts and then just maybe as a second question. You know you just mentioned that.
The AWS kind of target customer was more market.
I guess, just given that they already have their own kind of contact center product, just what whereas the discussion between kind of your own contact center product versus their their product that would be helpful. Thanks.
Hi, Anita so just in answer to your first question, Yes, we are certainly.
Taking the current macro into account and what we see in the market today in our guide.
Which has a degree of prudence.
We are not.
Factoring in any improvement in the MACRA.
And in terms of your question around the cuts we made in whether that is one of the factors in the guide what I would say there is you know the actions we took and I think we covered this partly in last quarter as well, but I think it's worth reiterating they were really around them.
Being more productive and improving the productivity of our sales motion.
And we didn't make any cuts to sort of frontline sales and I think that's a really important point and then some of the other leavers that youll see.
Come through the P&L and end with our subs.
Subsequent quarters and in margin improvement and it'll be things around program spend and procurement savings vendor rationalization those kinds of things, which to me would be correlated with growth in anyway. So our guidance is very much factoring in what we see in terms of macro.
Today and the other thing I would add is that you know we are.
Going to be disciplined when we evaluate deals and that's something that you know is that I sort of guiding guiding principle for us.
So you know that's why we are able to defend our position and keep them above $30 and why our subscription gross margins are still you know healthily above 82% so that would be the only other factor I would call out.
Very good Meda, and then answer the AWS section of your question.
First the addition of bring Central's MVP and contact center solutions are simply going to give AWS customers more choice AWS of course, we will continue to offer their own solutions as well.
By adding us.
To their marketplace into their sellers theyre, giving the customers that they have the advantage of a tightly integrated market leading solution that addresses the needs of many organizations that are looking at buying UC and cc together, which is one of the key trends that we've been calling out for quite a few quarters.
And then to the second half of your AWS question think of it as being sold in two ways one via the AWS marketplace and then the second one via AWS sales reps and while products from other UC vendors are available today on the AWS marketplace ring Central N V P.
Is the sole UC solution that AWS reps will be proactively selling and receiving commissions for this arrangement does not exist for any other UC service from another provider.
The next question is from Brian Peterson with Raymond James. Please go ahead.
Oh, hi, Thanks for taking the question. So maybe maybe a higher level question on the go to market I believe in the past.
It had this partnership ethos in it and it's really been emphasizing in that channel was really a way for you guys to help drive scale, we've seen significant improvements in the CAC. So I'd love to understand kind of with this new profitability profile and kind of go to market motion.
Does the direct versus indirect or channel relationships change in how do we think about like using that as a margin lever going forward.
It's a great question. So let me respond to that with a couple of key points. The first one is we're still committed to our strategy of partnering with the world's most recognizable brands across service providers hyperscale or as legacy PBX providers et cetera, we know that that motion gives us.
This unmatched reach into many addressable markets.
By agreement is now enhanced expanded extended mitel continues to be a strong partner, we're very happy with what we're seeing with our service provider relationships.
And then relative to Atlas and L E.
What I will tell you is.
And suddenly and I've said, we've been looking at every aspect of our business.
And as part of that we have made various changes to the terms of the arrangements that we have.
With Alto and Alcatel Lucent enterprise I'm, not able to get into the details of those arrangements or the new terms other than to advise that alien Atmos now have non exclusive go to market motions.
We believe that these modifications were on solid economic terms with the intention of helping drive migrations to our leading cloud communications products and then to the last part of your question what I will say is that.
Over the last few months, we have brought down the upfront commission costs across the broader channel and bar ecosystem as well as call. It the commission costs to our direct sales base building on some of the comments that sort of Lee made earlier today while.
While at the same time also allowing top performers across both the channel and our direct sales the ability to make more and that has not driven any sort of material change to deal activity.
Our overarching goal is using all of these levers to drive ever more profitable growth.
The next question is from steric Rebecca with Wolfe. Please go ahead.
Hi, Thanks for taking our question.
Can we hear about just how youre thinking about seat growth versus our two growth contemplated within the guide.
And then just a quick clarification I believe you mentioned in operating margin exit rate for 'twenty, three and I missed that so if you could just give that again it would be very helpful. Thank you.
Sure. So I'll start out with the second part of your question, then I'll hand over to MAU around our secret sauce, and how it's incorporated into the guide. So yes, you heard that correctly. So we are.
Guiding to operating margins for the full year 'twenty three of at least 18%.
And you heard me correctly, we are targeting and expect to exit Q4 with operating margins of at least 20%. So you may recall two quarters ago, we gave that 20%.
Our medium term guide and we are now very happy to tell you today that we will exit Q4 'twenty three.
20%.
And then building on that to talk about the our proportion of your question I mean, our overall ARPA has remained stable now for the last one to two years at about $30 and frankly, we're not seeing competitive pressures impact our RFP at the end of the day and this goes back to our guiding mantra.
<unk> growth, we're being disciplined we're entering into deals that are profitable and you know we're expecting that our a R. R will grow above our revenue growth in 2023 are tied to each one of those aspects.
Okay.
The next question is from Michael Funk with Bank of America. Please go ahead.
Hi, Thank you for the question. This is Matt Bullock on for Mike Funk My questions around business momentum. So clearly some conservatism built into the guide for <unk>, but obviously a step down in growth.
<unk> talked about some sales cycle elongation smaller deployment side just for a couple of quarters now just curious on any trends you've seen so far within the first quarter and if you've seen customer behavior kind of stabilize thank you.
Yeah. Thanks for the question and the net there is were seeing very similar trends so far in first quarter versus what we saw in fourth quarter.
And as I've mentioned during my prepared remarks.
Sales cycles remain elongated we have seen the size of initial deployments declined sequentially throughout 2022 and that was true in Q3 to Q4 and you know from a churn perspective, we did see a degree of year over year improvement in Q4 is usually our seasonal.
Hi on churn, but improving trends year over year.
Yeah.
The next question is from Ryan Macwilliams with Barclays. Please go ahead.
Thanks for taking question well I'll touch on in your Microsoft teams opportunity are you seeing more wins to this channel and is this helping you get into larger customers. Like is also helping pull through your contact center deals and Wednesday, including Microsoft partnership.
Thanks.
Very good yeah as I mentioned in my prepared remarks, we are seeing triple digit growth.
Into our Microsoft team's practice.
And yes.
To the second part of your question, we are definitely seeing an up market skew to the customers who are purchasing or Microsoft teams products and it really becomes about the value of the the products capabilities five nines, the integrated UC and Cc.
Your point.
That is b.
Unique in our offering there and inherent to those two things, it's skewing up market and the power of UC and Cc together, we are seeing a very strong attach rate of contact center, when we're selling into Microsoft teams.
The next question is from Terry Tillman with Truth Securities. Please go ahead.
Thanks for taking my questions, Hi, Vlad Moe and suddenly.
Two quick questions. The first one is on the contact center side I mean, while you're talking about you know some of these dynamics that have been.
I need to weigh on the business.
And then the contact center side is there anything different though in terms of our our activity and is that more resilient or is it about the same type of dynamics that you're seeing on the PBX side, and then I had a follow up.
Well, we are seeing that our see Cas.
Our our is now approximately $300 million, which frankly, we think is pretty amazing and positions us as one of the five largest sic has players on the planet. We are seeing the growth trend above the company average and well above the market growth as well.
Relative to our attach rate, we're seeing it be attached on our larger deals call. It the million dollar plus deals are fairly consistent rate of over 60% for some number of quarters and at the end of the day I think it speaks to the the trend from in the buyer community.
If you will of customers are looking for tightly integrated UC and cc capabilities and the unique differentiations that they get when they're purchasing our market, leading UC product and this market leading cc product together.
The next question is from George Sutton with Craig Hallum. Please go ahead.
Thank you relative to the Avaya bankruptcy is it logical to assume customers premise customers that avaya will feel some discomfort from that move and could accelerate migration is that something you historically have seen.
Ah, yes blocks here Luke.
Blue we actually.
No no one wanted to.
To go bankrupt again, but we.
We are firmly of the opinion and to think of Viacom Coors, we remain the absolute best cloud destination, though destination for their world's largest customer base migrating from Clos.
We have the integrations, we have endpoints support we have channel relationships.
And you know we have the sales process as well or just to remind everyone Oh.
Many many hundreds of thousands of seats that have already moved under the original agreement. We expect this to continue.
And you know hopefully accelerate but at least continue.
With a with a new structure and you know it's a win win for both companies, but most importantly, it's a win for customers and if you think about it sure no one wants to deal with the bankrupt provider environment, Nevada customer, but a no. One is also expecting for this bank.
A C to last too long. This is why there is a pre pack where part of the pre back and look I'm not in a you know a bankruptcy attorney or basically about I think general expectations are that this is going to be a relatively short and relatively painless process and does the company will reemerge.
Our budget is a substantially stronger entity with a stronger balance sheet much better death coverage, you know et cetera.
So if you're a customer you know.
Frankly, what are you going to go you know if you want to go.
It's really hard to go from on Prem to on Prem you might as well go to the cloud why not go to the absolute cloud Ucas leader, which is around central and which cause all of these differentiated integration senescence was about it. So we I have to say what do you really view. The good you know given the backdrop, we feel really good.
We ended up.
They feel the same and we'll see what the future brings again, many tens of millions of seats on Prem wisdom in particular ready to be migrated.
The next question is from Matt Stotler with William Blair. Please go ahead.
Oh, Hey, thanks for taking the question just two for me. So one I think you talked about changing the terms of the Astros agreement with that business being sold to Mitel, what are the implications there for ring central both or.
Absolute basis, when you think about kind of the trajectory of that business historically versus what you expect going forward and then the second question is on the on the converts just now you have the debt facility that you can leverage for that what are you waiting for in terms of kind of what's the.
What do you need to pull the trigger on that and then what should we expect in terms of interest expense associated with those that credit facility.
Very good so I'll start with the Mitel auto is one and then turn it over to subtly Mitel is an important partner they contributed solidly in 2022 sequential seat growth every quarter.
As you stated Mitel and analysts are currently in discussions.
Nothing is final as far as we know if they do combine it doesn't change. The fact that there are millions of on prem seats for them to convert and our agreement will continue to be in place to be Mitel is exclusive ucas provider and then time will tell and we'll see what happens there.
Yeah.
So just to answer your question on the convert obviously, our current convert is that paying interest at zero percent. So.
It really comes down to to market conditions and in looking at the trade off between that zero percent facility versus.
You know the discount that converts are currently trading at and that's something that we as a management team will continue to evaluate them.
We obviously don't feel any pressing need to go and do anything immediately and.
The great thing about the financing that we have structured is that we have this delayed draw aspect to it. So we feel like we have a lot of optionality and flexibility there and as we grow our EBITDA significantly over the next couple of quarters.
Optionality only increases from there.
The next question is from Michael <unk> with Wells Fargo Securities. Please go ahead.
Hey, Thanks appreciate you fitting me in.
The margin guide for at least 18% suddenly it's a big step up from the more than 350 basis points, you were talking about last quarter.
It does have an 18% or higher attached to it. So can you just speak to what would drive that number higher how much of it is tied to outgrowth ends up versus additional optimizations youre seeing on the cost side.
Yeah. So.
Look I would say if growth ends up being better than that would be incremental to where we're guiding.
So the guide on the margin is consistent with the revenue guide that we gave today and you know as we said.
The guide does not embed or incorporate any improvement in the macro or any deterioration for that matter.
In terms of the drivers labor savings as you know given the actions we took last year, that's about three points of the margin expansion.
And then the remainder will come from optimizing spend in customer acquisition.
And then third party spend and that's you know rationalization of suppliers, we have a very big procurement project going on at.
At the moment, but ultimately we expect operating profit dollars to be up around 60% 2023 over 2022, and that's on top of the 50% year over year increase in operating profit dollars that we achieved for this year.
And then I'll just once again reiterate that we do expect for Q I'm operating margin to be at least 20%. So that 600 basis points above where we ended in Q4 this year.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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