Q3 2023 RingCentral Inc Earnings Call
Good afternoon, and welcome to the ring Central third quarter 2023 earnings conference call.
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I'd now like to turn the conference over to will Wong Vice President of Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to ring Central third quarter of 2023 earnings Conference call. Joining me today are Terry will be Audi CEO last minute founder and executive Chairman and suddenly parents CFO.
Today will include prepared remarks by Terry why don't finally, 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 got 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 and are not guarantees of future performance actual results may differ materially from our forward looking statements and we undertake no obligation to update these.
After this call for a complete discussion of the risks and uncertainties related to our business. Please refer to the information contained in our filings with the Securities and Exchange Commission as well at today's earnings release.
Unless otherwise indicated all measures that follow are non-GAAP with year over year comparisons a reconciliation of all GAAP to non-GAAP results provided with our earnings release and in the slide deck for certain forward looking guidance a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations.
Its website with that I'll now turn the call over to Derek.
Good afternoon, I'm excited to be on my first earnings call as being central CEO we.
We had a good quarter as we exceeded our guidance across our revenue and operating profit metrics.
He will provide more financial details shortly but the.
The key takeaway is that ring central continues to win and innovate and they can pay.
If market.
We win because we have an industry leading product that is mission critical to many customers.
In particular within the SMB mid market and consumer facing verticals Green Central is it the factory choice for many businesses, given our leading reliability priority integrations and commitment to innovation.
This theme was it burned through all of the many conversations I've had with customers and partners since I took on the CEO role in August.
It is also why I am optimistic about our goal of driving sustainable profitable growth.
I C E O I wouldn't be focused on delivering our plan to help us realize that goal.
Today I'd like to share a few of my initial observations.
As well as areas that we'll be targeting to unlock growth opportunities and drive increased productivity and profits.
First regarding my initial observations about our business operations.
As I alluded earlier ring central is an innovation leader.
Lab and the R&D team has been busy over the last few years building out an AI platform and we are now leveraging to infuse AI across our entire portfolio.
Combined with our Ucas leadership built over the past 20 years, we are now transforming into an AI first multi product company with proprietary offering a new gas she gas conversation intelligence sales analytics and events Webinars and meetings.
Now I will discuss in more detail, our recent product developments and focus areas going forward.
Additionally, Shao Lee and her team have done a great job of delivering increased profitability in 2023.
Our operating profit dollars have increased over 70% year to date through actions such as more disciplined spending reducing organizational spans and layers consolidating vendors and driving down customer acquisition and retention costs.
The key takeaway is that we're doing many things well and Green Central's Foundation is strong.
I believe we can build on that foundation to unlock further growth and productivity.
Moving forward I will be focused on a few areas to deliver on this potential.
They include number one continuing to innovate and build and multi product business.
Two focusing more deeply on customer segments and key verticals.
Number three expanding partnerships.
Number four growing internationally and finally number five increasing operational productivity.
First let me share with you on a high level, our plan to build a multi product business.
T X a ring fence AI platform and when central events are starting to gain strong traction.
There are a natural extension of our core four.
For example.
Fortune 500 company partnering with ring central this quarter or to solve a critical and journal communications use case, where each employee's enable the purchase of over 25000 M. B P and 1000 rigs Dx licenses.
Using a combination of green Central N V. P. N ream CX, we're able to help them reliably connect drivers are these factors, while integrating seamlessly into their other technology workflows.
I mean, he actually is just one example of a new product. We've recently introduced going forward will be focused on continuing to invest in our new products as well as their related go to market rollouts to ensure they will be successful.
In addition to these new products are attracting new customers. They will also provide an opportunity to expand our footprint within existing customers.
Our net retention at roughly 100 per cent today is below where I think it can be particularly because we now have more yourself.
Additionally, new products also create more stickiness as the more customer adopt our differentiated offerings the more likely they will remain a customer.
Second regarding developing a deeper focus on customer segmentation and key verticals one area I'm investing more in is the SMB and mid market, which was 57% of our business in Q3.
These cohorts have traditionally been underserved by largest vendors and thus are not encumbered by the bundling dynamics that may influence larger customers' decisions.
Also within this market voice remains our primary method of communication for these businesses and they pay it green Central's given our clear leadership in cloud voice.
I driving incremental focus on the SMB and mid market, which provides us with a significant opportunity to sell our full suite of communication tools.
We have also seen good progress in key verticals, such as healthcare education financial and professional services.
And public sector.
For example, the top four dental service organization run on Green Central.
Thousands of other health care organizations I've also selected us for our proven reliability deep integrations and commitment to innovation.
Quarter.
Boston Medical Center Health system, the largest safety net hospitals and busiest trauma center in new England.
The dream central to modernize their business communications.
Central's joined you guys. Since you guys are offering.
Boston Medical Center, a health system will have one integrated voice platform for both internal and external communications, we shouldn't improve their provider and patient experiences.
There is more we can do to capitalize on our success in these bold verticals one way is by tailoring our solutions, even more in both the enterprise and SMB mid market. For example, we continue to invest in obtaining certain governments justification for the public sector.
We are developing other specific integrations and go to market strategies for industries for which voice is mission critical.
There are also many ways, we can bifurcate the enterprise segment, which specific go to market motions to better address customer needs. For example for enterprise customers with a team's deployment, we can sell green central 14th two zero.
This motion allows us to provide voice functionality and potentially attach other products such as contact center to our offerings.
Now moving to partnerships.
Our current partnerships with global service providers, such as AT&T E Tellers, and Vodafone and strategic partners Nice Avaya and Mitel unify provide us with the broadest reach in the industry and are a key differentiator.
We will also focus on other partnership opportunities that expand our partnership ecosystem, including new relationships with other service partners and Isps that can help us expand our reach more to come on this in further quarters.
Moving to a geographic expansion international has remained roughly 10% of our business for the last two years.
Has the potential to be much higher.
I'm focused on how we can leverage our distribution channels and partner network to grow outside the U S. With a particular focus on Europe, where we have go to market operations and several partners in GSP relationships.
Last but by far not least is my focus on materially increasing productivity.
One area that is high on my radar is stock based compensation.
We're fully committed to and are taking tangible steps already towards materially reducing stock based compensation.
Another key area for me is sales and marketing expense.
We have seen sales and marketing spend increased only 2% year to date, while subscription revenue has grown 12%. However, as a percent of revenue. This is still above where I think it should be in the current environment.
I am reviewing our go to market motions, both before during and after the sale to ensure that the cost of acquiring and maintaining your customer is optimized.
I realize that while some costs such as residuals have a longer tail there are opportunities to better align our sales and marketing investments to the value they create.
There has been some good early traction with initiatives such as our new channel program ignite that is aimed at reducing dependence off resellers on marine Central's on Salesforce.
Besides direct impact on improving overall productivity and lowering sales and marketing costs.
We're not taking an additional step to adjust and optimize our cost structure reallocating resources across the company and routes to market over the next few months as we operationalize these productivity initiatives.
I Hope my initial observations and then focus areas are helpful to you in understanding we can central excuse me for insurers as well as opportunities for advancement, while the macro has had an impact on our business. There are also areas that are in our control and that we can enhance there's a clear plan and we must now execute on these priorities.
I believe the combination of our solid core strong team and exciting and disruptive new products positions us well for the future.
I also want to take this opportunity to thank everyone Edwin central for delivering a solid Q3.
With that I'm going to turn the call over to Vlad, who will discuss in more detail one of the key pillars of our plan innovation and new products.
Thanks Derek.
As I've said before AI.
The mother of all the Mega trends is upon us.
With the open board I cannot work, even more closely with our product teams to ensure lymphangial remain an industry leader in this new year.
My day to day focus is now to infuse AI across our entire portfolio to improve cooler employee.
So this agent experiences before Julien after each interruption.
Our vision and commitment is to be the ISO business.
Business Communications leader.
We have made good progress towards this vision with the launch of our reinsurance platform.
Sure.
We have rapidly innovating to infuse it brings them.
Into all our products.
This includes a in Egypt.
First Omnichannel contact center platform.
Yes.
But they shouldn't intelligence platform makes sense.
For sales and profit, which we acquired in July and you blend.
With central device.
Links here and drink Central Iran will be joining rune central industry, leading cloud PBX MVP solution Lynx Central contact Center Lynx central.
And Webinars and links that's what's there that's doing it with central is the true multi product company.
Company.
So let me give you some more detail about the progress we're making on some of those new products.
Sure.
Yes.
Now in controlled availability and is expected to be generally available later this quarter.
In Q3, we embedded our ring fence.
The technology integrates here to enable smelter conversations before during and after it beat your direction.
In addition to being a ice rinks here of Q2, our core brand values of trust reliability openness and ease of deployment youth employment ship brings.
It brings he actually deployment are measured in days or two weeks and not months or quarters did you clear brings here is no strictly limited with SMB.
F N b.
Markets. In fact, there are also a lot would you call somebody whose particular use cases are lined up well with what brings the first offer.
This includes a 1000 plus seat win from a fortune 500 company that I mentioned.
Marine CX is a good complement Darwin central conflict physical right.
But it's generally more complex use cases and larger deployments.
While still in control of their liability well what do you have approximately 50 customers hooked up so that could lead CX.
In addition to <unk>, we're also working hard at reintroducing shopping event.
I think central events.
This product, although they default some of the worlds most recognizable brands in.
But snow events cause this includes Spotify and many other of the worlds most recognizable names.
We will provide more detail on both links here Edwin central event at our upcoming Lynx Central innovation event that will take place on November 14th.
It will of course be hosted on our very own ring central events.
We hope you can join us virtually.
And more about our latest innovation as well as T O directly from customers about so that had been taken from this brother.
In conclusion.
Never before has it makes sense, okay. Sachin extensive it's fully built out.
It's Paul here.
We're making great progress in embedding AI into the entire portfolio, creating even more value for our golf course, I could not be more excited about our future with that let me turn the call over to suddenly.
Thanks Rod.
I will now provide highlights from the third quarter, and then discuss our business outlook for the fourth quarter and the full gear.
Subscriptions revenue of 531 million with a 10% year over year and above our guidance range.
Uh Huh of 2.26 billion was up 11% versus last year.
On a year over year basis currency was a modest tailwind, but on a sequential basis.
What was it roughly 10 million headwind.
Growth was led by the Enterprise segment, where we continue to see strong contact center attach rate.
We again saw more than 60% of our large million dollar plus TC Libya include both you care and food care, including a recent news the Pos system with the San Francisco Giants.
Now moving to profitability.
Referring to non-GAAP results unless otherwise noted.
Our subscription gross margin was 82% consistent with last quarter.
Oh, well ARPA was again above $30.
Our new products, while disruptive in pricing relative to the market should be accretive to our overall ARPA overtime.
Our solid ARPA supports our strong gross margin.
Operating margin of about 560 basis points versus last year to $19, 1% drip.
Driven by operating leverage and continued efficient.
Our third quarter operating margin was solidly above our outlook for 18 to 18, 5%.
Well, we invested back into the business to support our new products.
Primarily for sales and marketing initiatives.
We were able to drive increased productivity from our current workforce instead of hiring additional head count which resulted in stable that's flowed through to the bottom line.
Our increasing profitability translated into quarterly Unlevered adjusted free cash flow of 87 million up from 33 million in Q3 22.
Moving to our balance sheet.
In August we issued $400 million of eight 5% senior unsecured notes due in 'twenty 30.
We used 155 million from this issuance to repurchase 166 million in debt consisting of 125 million of our 2025 convertible notes and 41 million of our 2026 convertible note.
Including this transaction, we have used approximately 546 million of cash from our term loan.
The unsecured note due in 2030, and our balance sheet to repurchase 586 million of the original 1 billion of 2025 net.
Capturing a sizable discount.
Since I joined brings central last year I have noticed that addressing the 2025 convertible notes before they go current with a key priority.
We plan to utilize the remaining approximately 249 that person from a recent high yield offering plus an additional commitment to our term loan of 75 million, which we will have the option to draw upon within the next nine months.
And a portion of the free cash flow, we expect to generate over the next 15 months to address the remaining 414 million of the 2025 now.
Importantly, as the 2020 five notes carry a zero percent coupon and we are earning a solid return on our cash we will remain disciplined and will balance note repurchase prior to maturity with the amount of discount we are able to capture.
In addition to addressing the upcoming 2025 convert.
Our leverage remains very healthy.
First our third quarter results, our trailing 12 month net leverage ratio was three times and based on our current outlook. We continue to expect to be below three times and four kids.
Before I provide our fourth quarter and full year guidance I'd like to provide you with additional detail on the macro trend we have seen in the market today.
Macro trends are largely consistent with last quarter.
Sales cycles remain elevated versus last year and customer buying decisions continue to go through additional layers of approval.
Linearity has also become more backend loaded.
And in many enterprise transaction, including this quarter, we have seen customers waiting until the last week or two of the quarter to close on D. R.
We are also seeing less upsell within our existing base as customers have slowed hiring and rationalize their employee count.
Importantly, marketing driven league.
Consistently strong.
Demonstrating continued demand for on Prem to cloud conversion.
With that backdrop, let me now turn to guidance.
For the fourth quarter of 2023, we expect.
Subscriptions revenue growth of 8% to 9%.
Total revenue growth of eight 9%.
non-GAAP operating margin of 20%.
And non-GAAP EPS of <unk>, 82% to 83%.
For the full year of 2023.
Fight the incremental currency headwind, we are raising our revenue and operating margin outlook.
I would expect.
Subscriptions revenue growth of 11%.
Total revenue growth of 11%.
non-GAAP operating margin of 19%.
This is up 660 basis points versus last year, and 25 basis points above the midpoint of our prior outlook.
Lastly, we expect non-GAAP EPS of $3.19 to $3.20.
Additionally, given our better than expected profitability as well as cash conversion in Q3, primarily driven by better working capital management.
We now expect adjusted Unlevered free cash flow of 290 to 300 million in 'twenty to 'twenty three.
270 to 290 million premium right.
Note this excludes $20 million to $25 million related to restructuring and other payments that we have or expect to incur.
Lastly, we expect stock based compensation of 426 to 431 million in 2023.
Approximately 19, 5% of revenue.
Well this is higher than our prior guidance. This is related to the recent management changes that we undertook in August.
Additionally, we put in place performance stock units is here to demonstrate alignment between management incentives and company performance.
These classes are accounted for under an accelerated expense attribution model compared to restricted stock units and that's resulted in higher stock based compensation from 'twenty to 'twenty three versus our prior outlook.
We would have been at the midpoint of our prior range excludes these items.
As Terry stated.
Materially reducing stock based compensation going forward is a key priority.
And we are implementing actions to materially reduce stock based compensation over the next 12 months, we will share more on these actions and targets next quarter.
In summary, Q3 was a good quarter, we delivered on our guidance, we continue to invest for growth.
And we demonstrated a proactive capital allocation approach.
While the economic environment remains uncertain, we will remain focused and committed to executing against our priority of delivering sustainable growth and profitability 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 are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
In the interest of time, please limit yourselves to one question.
Our first question is from Matt <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the question maybe a question for Tarek now that you've been in the CEO seat for a couple of months can you maybe talk a little bit more on where you see the greatest opportunity that's untapped for ring central whether it's underserved markets underserved customer sets are on the operating front and I know you've laid out.
<unk> key priorities, but where do you see maybe the most immediate opportunity to start executing against thanks.
Oh, Thank you Matt for the question and welcome to our call.
I'd say since I had the opportunity to serve on the board since.
December 2022, I believe I have a good understanding of the business and I spent most of the past 60 days talking with customers partners employees and shareholders since I've taken on the CEO role I do believe there are tremendous opportunities for ring central building on the solid quality foundation of our core.
Products and Ucas, and there is a big opportunity to provide more to customers and particularly in certain verticals, such as SMB and mid market.
We are also at this junction of the industry in a unique position to harness the power of AI given the size of our installed base, we've been investing in a AI platform for a number of years, we're infusing AI in everything we're doing and if you really put that in perspective of the U F C gas industry.
And as a whole these are being disrupted by eye and this presents us with plenty of opportunities to innovate and capture share.
And that is a very critical when you're considering that we have scale.
And we have again, a strong reputation of quality, which allows us to maintain our leadership in a competitive and increasingly disruptive industry. So that's why I'm looking forward to do is to continue to add scale and continue to sustain long term profitable growth and ring centrally.
Thanks Derek.
The next question is from some odd Samana with Jefferies. Please go ahead.
Hey, everyone. This is belief at Simmons on for some odd suddenly with its existing customers either buying less seats or trimming head count you remind if its kind of its contracts allow a customer to reduce seats.
Put differently you can a customer pay for only 900 seats, even if they're contracted for thousand if if they were to reduce head count by 10%.
Hi, Thanks for the question. So in terms of our contract no customers are typically our average contract length is just over three years and customers typically would be contracted for the full amount of seats that they signing.
Contract for and there is not typically any flexibility for a customer to reduce seats of course, we always offer flexibility for them to add seats.
So hopefully that answers your question.
Yeah.
Perfect. Thank you very much.
The next question is from Michael Funk with Bank of America. Please go ahead.
Yeah, well. Thank you all for time and then the question Tonight. So so tarakihi you laid out your car.
Priority one of them was productivity, you said, taking steps to materially reduce sales and marketing expense.
Is there a good benchmark for a metric we should think about what's your target for sales and marketing.
Look I wouldn't use benchmarks for really determining and and a percentage of sales and marketing spend as a percentage of revenue and the reason why this is is that you need to retain flexibility to go and capture opportunities as you see them and it's always important.
To understand our productivity down to drive the level of our sales force and our channel partners and see to what extent are we are acquiring growth effectively and that the growth has to come with calories are mindful of the cost of customer acquisition and the cost of retention of these customers. So.
We do believe there is upside in the short term and becoming more effective and efficient in sales and marketing and you know when you really look at our spend as a percentage of our revenue today. It is too high for my own liking.
Considering the gross we're delivering so you can determine whether or not you know we we do is that spend for the same gross or keep it but we need higher gross and that's a reflection that we have to ask ourselves as we look at this very important part of our P&L.
Great. Thank you very much.
The next question is from Ryan Macwilliams with Barclays. Please go ahead.
Okay.
Thanks, taking the question have you seen any material changes since the end of the third quarter on the macro front and are there any differences into how your SMB customers compared to your mid market enterprise customers are dealing with the current macro environment right.
Look it's.
It's a good question obviously the macro is what it is and you all know and read through the news there is no.
No particular change relative to prior quarters and the customer feedback that we get about ring central is that our product is mission critical to that business, yes customers are looking for ways to save money.
But where you really look at the payback from a customer standpoint with ring. It is measured in weeks and months not years and just to put things in perspective for you from a customer standpoint, you see brushy payback period is below six months and they are either being generated for them is in north of 200%.
So specifically for the third quarter of 2023 SMB growth has moderated and this is certainly driven by continued macro uncertainty. The enterprise segment sales cycle remains a elongated versus last year as.
As we spoke about in the past upsell is being impacted by slower growth in head count at our customers' rationalization of their spend and more scrutiny on cost in general, but we do believe that our new product introductions will help with upsell over time and this is exactly why we're positioning ourselves now to.
[noise] emerge out of the Microsoft Nash with strength with a multi product portfolio and so I would say macro bowl is stable and we have not seen them you've seen any change in in terms of easing conditions.
Hopefully this answers your question.
That's perfect I appreciate the color.
The next question is from Kash Rangan with Goldman Sachs. Please go ahead.
Yeah. Thank you very much and good to see the stability results. One for you maybe have like a jump in here as well as you introduce the AI functionality.
Do you do you think it will how do you think it will change sales cycles make it faster or slower the economics of the sale et cetera, and also what does it mean for our pool and retention.
<unk>.
Therefore, the growth prospects of the company. Thank you so much that's it for me.
So this is a very big question, you are asking cash and I would say if you take the perspective of our customers.
And you look at what we can do with our integrated you Cassie gas offerings is we can add value to them at all steps already conversation.
Before the call during the call and after the call.
And the examples of that are fairly intuitive and easy to understand before the call and you can make sure you understand the context.
In which the call is being placed during the call of course, you can do cool summer easily can do much more than that you can add a lot of value add a way of understanding what has been said in the call the tone in which the call took place.
<unk> really spearheading post call a number of different actions.
Moving forward. So there is a ton of things that can be unleash where our customer. Thanks, Dewey I and we are infusing AI throughout our offerings precisely because we see AI as a incredible opportunity for our customers to enhance their own productivity and competitiveness and this is why we are spending it.
A lot of time, there I will asked.
Ask the larger to chime in on this issue because he's spending and we're spending a lot of time here and here's the the power Bihar behind the AI efforts that we're deploying right now lot synthetic yeah, Catherine Best equation look let me address the retention part of the question one with things that it should.
Prove a redemption.
In a meaningful way because these insights that are being generated.
You know at least in part generated from customers own data. Therefore, one would think that the goal.
System engagement, what does become stickier, because now moving to a different platform would mean.
They no longer have access to those insights.
It's obviously very early and you know it's too early to talk about empirical data but in theory.
It it should work issues what was it the way are also just a quick comments on the sales cycle and I don't know how to say it any other way you just sexy as Hell you know it makes her a great demo yeah. When you know we show a ring sense for.
Example, and the type of insight and type of questions that people can get Oh looking at the calls.
Calls you know after the call has been made.
For whatever reason is it's it's it's emotional for people go Oh I didn't know this you know.
So AI are what they said in the prepared remark. It truly is the next great Mega trend I call. The mother of all my good friends and I stand by it it it's going to revolutionize our you know the world our industry, Andrew Central you know it's multiples.
Can we be more excited.
Cash I might just add something there as well you were asking about.
The impact on <unk> from these new products.
Clearly we are very excited about them.
Pricing these in a disruptive manner, but they will still be significantly accretive to our overall ARPA. So you heard in my prepared remarks, I talked about our Pooping stable. We would expect this to be additive to that and in terms of incremental investment around go to market.
We actually don't anticipate any significant incremental investment. So it should also be accretive to LTV to CAC them as they look for it.
Mhm.
You so much.
The next question is from Brian Peterson with Raymond James. Please go ahead.
Hi, Thanks for taking the question. So tarik, you're initially call about partners and potential opportunity to expand there I'd love to get more color on that as we think about great sectors into 2024, how should we think about the ramp in some of your partnership efforts there. Thank you.
Thanks for the question, we do have a number of partnerships that are working very well for US right now both in terms of global service providers, such as AT&T tell us BT, Vodafone et cetera, and also strategic partners like NYC and contact as I Mitel now Mitel unify.
And we have a great week. Thanks to these partnerships I do believe that there is a number of additional upsides from these partnerships.
And also new partnerships that we can build.
So in particular with focus on partnership opportunities that will expand our partnership ecosystem.
Focusing on <unk>. So that we can continue to expand our reach and also build a more value added offerings, particularly on a industry vertical basis, where there is a lot of things that we can do to.
Sure that our product is connected with a broader ecosystem of verticals to penetrate those verticals selectively. So this is one of my key focus areas for the future and you know in terms of the ramp.
It will take time, but you know how these partnerships are they they take time to set up but one day are in full motion. The volume that we expect there can be considerable and so this is why it is a critical focus area for me.
Hum.
The next question is from meta Marshall with Morgan Stanley. Please go ahead.
Great. Thanks.
Maybe just following up on that question just trying to get a sense of you know as you guys incorporate more direct.
Versus channel versus some of the revisions that were made to the partnerships earlier in the year or to allow them to kind of sell direct just is there a blend of the business, where you feel you know you'd like to see a certain percentage come direct a certain percentage come through the channel through partnerships.
Forbes as a rough guide and is there any kind of channel conflict, that's kind of come in about just given some of the changes are.
Two the sales model. Thanks.
Yeah.
So this is a great question, Matt and thanks for asking it I'd say you know rather than talking about a blend I think what we need to focus on is penetration of our offering across the market. You know if you really look at your gas we are the largest player and we still have only a about 10, 12%.
Market share in that space, which goes to show that there is a a lot of upside in the market remains a pretty pretty fragmented and if you look at sika has the it's a little bit more concentrated but my overall comment is roughly the same there is lots of opportunities there for us to penetrate the market with both.
Our nice N contact offering, but also our wing CX, new offering that AR was in controlled availability up to today and that we are ramping up in the upcoming days. So if you also want to add to that the international dimension. A there is a lot that we can do internationally internet.
Actually.
We are.
Still at the beginning I would say our international revenue as a percentage of toys only 10%.
And if you really think about the.
Fabric of the European economy, or the Asian markets.
They rely on a different a distribution mechanism and different distribution tiers, hence the need for us to be ready capability wise to go and penetrate those markets with a different set of capabilities either on a direct basis or indirect basis with partners and that is what we are we are.
Don.
Great. Thanks.
The next question is from C. D Panic Rohit with Mizuho. Please go ahead.
Thanks for taking my question, it's good to see the sequential growth no more than 3% and subscription revenue are versus this 1% we saw last two.
Two quarters. So could you talk about what are the key drivers of that growth is it something you know upsell in enterprise or is it something step churn stabilizing what's driving that growth and how sustainable are even though we could expect any kind of improvement on that going forward.
Look I think so far I would like to say that it's early days for me, but I'm pretty pleased with the progress, we're making and the way we are executing so far nine months into the fiscal year. We are focused on finishing our fiscal year 'twenty three strong.
And we have a whole quarter Q4, where we just started and we have to continue to execute on it.
We feel pretty good about our about that and we will in doing so focus on my five priorities, which is to continue to innovate and build a multi product business. This is a top left right and center, where blood is spending all his energy boosting our multi product.
Portfolio offerings. This is really really critical to fuel growth in both new customers and upselling to existing customers. We are also focused on driving deeper penetration into certain key verticals and customer segments. We're building partnerships, we're growing internationally and yes, I have to keep an eye on on productivity moving.
For it so.
It's early days I I like the way you put forward the the growth we feel that our demand for ucas and see cash attach our Israel.
If you take integrated you can see cash as a whole as a subset of the market. This is where we play and this is the fastest growing portion of the market. There are some competitive displacements, particularly when you look at our subscale vendors, losing shares there is a lively competitive intensity with Microsoft teams where X.
Flooring that competitive intensity with our teams to the zero plus.
Plug in which we just rolled out and that is gaining.
Quite some traction and we will continue also to target enterprise customers with a best in class integration. So theres a lot to unpack here, but I would say you know we're focused now on the very short term wishes to finish Q4 strong and that is where all our energy is being pushed off.
Thank you.
The next question is from Matt Vanvliet with B T. I G. Please go ahead.
Yeah. Good afternoon. Thanks for taking the question wanted to dig in a little bit more on the plans for international growth.
How do you feel about your current head count in a number of those markets do you need to build out more of a team.
From both either the direct or the channel enablement side, and then secondarily with the stable of partners you already have in place do you feel like you can reach the goals you have or do you need to broaden that distribution network as well.
So look having run international businesses for large chunk of my career I think the way you decide to go.
In a particular new market is really a function of the economic fabric of that market.
And particularly true for software and services businesses like ours.
When you really look at for example.
In Europe, the weight of small and medium enterprises, which are our speeds sweet spot in Germany, it's about 87% of the GDP in France, Italy, and Spain is north of 90% of the GDP and therefore should we think about how do you go and acquire these customers in these geographies you you really have to.
I think what is the best message and most effective methods to ramp up.
Your access with the various routes to market to these customer segments and.
I'd say that there is an opportunity there by going through partnerships in particular, and we don't need to really.
Build an extensive large direct sales force to capture share internationally. I think you know philosophically also I'm not in favor of the approach that is about bills and they will come we need to be very pragmatic here and leverage existing partners in the market because there is in our view a large opportunity for us to become the <unk>.
First global cloud provider.
With our offerings, whether these are N V piece or the new offerings that we are right now developing with a lot of energy.
Great. Thank you.
The next question is from Terry Tillman with Truest. Please go ahead.
Great. Thanks for taking the question. This is Bobby Dion for Terry just one quick one for Terry since being in the CEO slot. What do you think is most misunderstood about the story at this point. Thank you.
Yeah.
Hmm.
It is the least understanding point about ring central I think I would say to you look not every you cast is created equal.
And the strength of the foundation that we have built.
Is there to stay and the numbers do the talking I mean, just look at the art boost you had thrown at you commenting on our archives and where they stand and look at the number of seats, we have more than 400000 customers worldwide, we're growing faster.
Faster than the rest of the Ucas market.
And even when you have a I would say a periods of economic uncertainty there is a flight to quality in these circumstances and we're seeing that and we feel good about our position now of course without and I are not happy with just that we want to continue to dial up growth and expand our portfolio and.
And expanding our portfolio over a quality foundation is a lot easier believe me than to worry about the core are the there is a lot that is going to be unlocked over the next few days we have telegraphed.
Telegraphed, a if I take this opportunity we have telegraphed a.
Marketing event.
On November the 14th to show that we are going to be expanding our core products are bringing CX and ring events to become.
Available generally or general availability and as you can see that our goal here is to build on the foundation that we have to emerge out of the spirit of economic uncertainty with strength and this is why we're making all the investments we're making in innovation.
Yeah.
The next question is from will power with Baird. Please go ahead.
Great. Thank you Yeah, Terry I was curious and some of the comments on focusing on SMB I know that's a you know a heritage area.
You know for you also I think often viewed as a more competitive area. So you know maybe just a little more color on the rationale for you know kind of refocusing in some respects are focusing that much more on SMB and where are the kind of the key investment opportunities are they kind of areas of low hanging fruit as you kind of evaluate that.
So look at it.
SMB has always been our sweet spot and it's not that we are refocusing.
On the on SMB for the first time, our F&B business is over 850 million. It is still growing at about 8%, which is much more than many of our competitors are growing overall, we have the leading ucas offering that is differentiated that is reliable with 99.9, 99% availability.
We are rolling now out ring, CX and ring sense for sales and we're seeing great traction, particularly for this segment of the market because for small and medium businesses, our new offerings are really around.
Adding value to the businesses in question and making them more competitive over time.
And we feel there is a lot more to do and are confident about our position in that segment of the market.
Thank you.
The next question is from Ryan Koontz with Needham and company. Please go ahead.
I think someone asked about product mix a little bit.
No you can't give us exact metrics, but can you kind of reflect on what's transpired over the past year in terms of a contact center upsell or you're seeing more of a shift towards contact center. It seems like it's got more durable growth obviously than in the core ucas space and just as a follow up on on the team's ciudadano opportunity. If you can give us any customer feedback you've had on that.
New product offering thanks.
Yeah, maybe I'll take that.
Uh huh.
Look our contact center is a you know, it's a less penetrated and ucas typically our ucas UC to ucas, it's still relatively early even though as well I mean, if you take all the numbers in Microsoft and zooms and put it all together.
No we're probably still leaves you easily under 20% you know.
But the contact center I would say it's earlier in that migration.
Interestingly enough contact center offers are interesting opportunities in.
In a there are some puts and takes there so traditional contact center vendors.
Who are relying on enabling agent seats.
You know that could be a little bit of a headwind as there will be less reliance from humans and more reliance on virtual agents and bought.
But for people.
Who are innovating in the area and coming game, you know from the perspective of an AI first approach and you know this crowd definitely includes ourselves of this point, we are seeing this as a major tailwind do.
Do you know to really take share contact center, a tense to be yet more sticky than you chaos.
All of those are more considered decisions generally.
And you know your question was over the last year, we've seen a robust demand for contact centers.
And especially for contact center.
Closely integrated.
With Ucas solution.
We sold that for a few years now.
You know via or a white label offering.
Contact center, what we're seeing now is that there is a I would say a renewed interest in AI sourced approaches and very importantly, Ian.
Our software is more.
Oriented towards a self service with easier and faster deployments and what we're seeing is even some of the larger deployments now and the thinking of our prepared remarks, we showed that we have some literally fortune 500 companies are choosing.
<unk>, TX, which by the way it's only in controlled availability you know as we speak here now, but we're already seeing a multi thousand seat wins.
Frankly, it's been the Pleasant surprise, you know, we thought that it would skew.
Lower but for now we're seeing a good traction that goes to the board and are expected to continue.
One thing I would just add there is that we are still seeing very very strong you can see cas attach in our larger deal so that more than 60% of our million dollar plus T. C. B deals again included a C class component and we continue to grow well above the overall market.
Got it suddenly thank you.
The next question is from Tim Horan with Oppenheimer. Please go ahead.
Thanks, guys I know the Microsoft Office Copilot with just was just launched but have you had a chance to study it and do.
It seems like it opens like a you know a dozen questions do you guys.
There's not a large improvement to their teams doesn't make the ability to integrate ucas and Sekos butter you don't it doesn't improve your partnership for you you know on and on I mean, there's a ton of questions. On you know one of the key questions as I'm talking 30 Bucks a month for it.
It's not really clear.
You're saying you guys think you can charge fees over time, but I guess the most important question is what is our copilot mean for the industry at this point.
Right.
Well number one it would have to ask Microsoft right look we are not prepared yet to disclose.
Additional details on <unk> ring Cf's pricing stay.
Stay tuned.
Coming and coming soon we do expect the pricing to be.
Aggressive if not disruptive.
So I would just again.
As a bit of patience on that.
Now having said this we are not competing with Microsoft we're leveraging what Microsoft because we are participating in the ecosystem that.
They're creating a we are both using our core innovation are from open AI.
And other companies in our case okay.
And we certainly expect and then building out our product.
To be and open platform.
And again not to pre announce anything but expect that every innovation that Microsoft has that Microsoft chooses and decides to make open and.
Interoperable with other platforms, we will be on that bandwagon okay.
So again I would just say stay tuned and.
You can also assume just in closing that.
Is that our early customers for our <unk>.
We are also well aware of other advances in the in the industry, including the copilot and given what they know of our road map and what we have today and you know Microsoft they're choosing to do business so more to come.
Well on that point do you think copilot as a major improvement on teams.
Luke.
It look it depends it depends I mean, it's a great idea devils in the detail right I mean Devil is.
Will it you know how accurate will it be you know it's not just the price point, how accurate will it be.
Will it or will it not you know hallucinate.
And you know data is going to be trained on and so forth I'm not really prepared to find one way or another I do think that it is a really good idea at the time Lydia is an idea that makes sense. Yeah co pilot is for Julian call Doug said in this.
You know ways that we classify as things before during and after I can tell you that there is a lot of interest in the during the call experience enhancements, which grew up by those addresses so when you have an agent.
No online was the customer are getting real time, hence our you know our data feeds are maybe even cold scoring all of the things that you know Microsoft is talking about appointment making for that matter in realtime.
All of those are timely ideas customers, who can get it but it's very very early and people are just in general trying to figure out what to do with this new capability.
And we have time for one more question and that final question is from Michael <unk> with Wells Fargo. Please go ahead.
Hey, there I appreciate you squeezing me on TARP you had at your comment in the prepared remarks around retention rates in the coming in below where you think of companies capable of is there any way for us to just help unpack how much of that is tied to macro and external factors versus just execution related opportunities you see in and thinking about key contributors there.
Are there any primary points of focus you'd point us towards thank you.
Yeah. Thanks for asking this and it's certainly a good way to finish up our conversation today.
Look.
Our retention rate there was around a 100% in Q3.
Really what will take it upwards from here is a combination of factor, but going forward, we're really focused on upsell and customer retention to drive higher net retention and when you have a multi product portfolio. It does help tremendously Ah.
The upsell sales motion because simply put you have multiple conversations you can have with our singles customers right.
And so our new products shrink CX ring sense are you ring events provide opportunities.
I mean customers and by the way when a customer buys more from you than that customer is stickier over time, which helps also.
<unk> net retention. So this is exactly the reason why we are innovating and to be able to capitalize on the opportunities of this new product portfolio when Eaton.
Thing differently in terms of our sales motions to help customers see the new parks value and therefore this is gonna be a journey over time, but I feel optimistic about the prospects of net retention in the long term for ring central given the how much emphasis we're placing on dialing up innovation with the team.
Thank you.
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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