Greetings and welcome to RingCentral Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Mr. Clyde Hosein, Executive Vice President and Chief Financial Officer for RingCentral. Thank you. Mr. Hosein, you may begin.

Thank you. Good afternoon and welcome to RingCentral’s third quarter of 2014 earnings conference call. I’m Clyde Hosein, RingCentral’s Chief Financial Officer. Joining me on today’s call are Vlad Shmunis, Founder, Chairman and CEO and David Berman, President. Our format today will include prepared remarks by Vlad, David and I, followed by Q&A. The primary purpose of today’s call is to provide you with information regarding our performance for the third quarter of 2014, our financial outlook for our fourth quarter and an update on our full-year 2014 forecast. Some of our discussion and responses to your questions may contain forward-looking statements including statements regarding our expected financial results for the fourth quarter and full-year 2014, our future plans, prospects, and opportunities, trends in the business communications market. Our expectations regarding our current and future carry-on other reseller relationships, our growth strategies, future market position on expected growth. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements and projections for a variety of reasons including but not limited to general economic and market conditions, the effects of competition and technological change and customer demand for and acceptance of our products and services. A discussion of the risk and uncertainties related to our business is contained in our 10-Q for the quarter ended June 30, 2014 and filed with the Securities and Exchange Commission and is incorporated by reference into today’s discussion. We disclaim any obligation to update this information contained in our forward-looking statements whether as a result of new information, future events, or otherwise. I encourage you to visit our Investor Relations Web site at ir.ringcentral.com to access our third quarter of 2014 earnings press release, our non-GAAP to GAAP reconciliation, our periodic SEC reports, a webcast replay of today’s call, and to learn more about RingCentral. With that, let me turn the call over to Vlad.

Thanks, Clyde. Welcome everyone and thank you for joining us today for our third quarter 2014 earnings call. I am pleased to share with you the combination of our differentiated service offerings and growth investments paid off again in the third quarter. We continued to deliver strong revenue growth particularly with our Office product and with larger customers. In addition we also showed significant improvement in both growth and operating margins in the quarter. These items combined to produce results that exceeded our previous guidance on both the top and bottom line. We saw strong results once again from our flagship offering RingCentral Office. The annualized exit monthly recurring subscriptions from RingCentral Office grew 53% year-over-year to approximately $154 million. And while Office overall showed strong growth the portion coming from customers with 50 users and greater continued to grow by more than 100% year-over-year. These customers represent a meaningful portion of our new business facility and accounted for about 20% of our new RingCentral Office subscriptions bookings in Q3. Overall our total revenue grew 36% to $56.9 million. We recently launched several product enhancements designed to support our move up market improve and user experience and expand our opportunity in the healthcare industry. In terms of up market capabilities we introduced user template, powerful analytics and reporting, multi-level IVR and integration with Zendesk. We also revamped our end user applications including real-time presence on the model application to provide a substantially better end user experience and increased productivity. In addition this quarter we released a HIPAA-compliant solution which will help us to better serve customers in the healthcare vertical. Our vision for innovative and easy to use business communication solutions is helping to drive the results we reported today along with increasing recognition from the industry. In the recent…

Thanks, Vlad. Our growth strategy remains focused on three main components; expanding up market to larger enterprises; adding additional distribution channels; and growing our presence internationally. We made progress on all three fronts in the past quarter, let's dive in each one. First we continue to expand up market with larger client wins in the quarter; the enhancements we’ve made to our sales organization earlier this year have allowed us to drive significant growth in customers with 50 users and above, while still growing our business with smaller customers. As Vlad indicated earlier, we demonstrated meaningful evidence of expanding up market as Office MRS from customers with 50 users and above grew by over 100% year-over-year again and this category represented about 20% of our new Office bookings for the quarter. One example of a recent large customer win was with Baierl Automotive, a large automotive dealership in the Pittsburg area with 11 locations. Baierl was facing a number of problems with their existing on-premise systems including multi-location complexity, cost and frequent outages. More importantly the lack of reliability and capabilities inherent their legacy system we’re unpacking the experience of their customers ultimately their business. Baierl now plans to take advantage of our advanced mobile functionality to enable it sales people to connect with customers while they are away from their desks, as well as deploying our Softphone throughout the service departments in each dealership, allowing for an enhanced customer experience when scheduling appointments. You’ll have RingCentral Office deployed across all of their locations rather than having to manage multiple providers. This multi-year contract encompassed 550 users. And other large win for us in the quarter was Tri-Valley Learning, an organization based in the San Francisco Bay area. Tri-Valley was looking for a solution to support not only a centralized…

Thanks Dave. As our revenues for the third quarter was 56.9 million, up 36% year-over-year and 8% sequentially from Q2 as our multi-executive growth strategy continues to produce strong results. This was above our previous guidance of $55 million to $56 million. Within total revenues, service revenues grew to 52 million, up 37% year-over-year and 9% sequentially, while product revenues grew to 5 million and remains roughly 9% of total revenue. Total Company annualized exit monthly recurring subscriptions grew to approximately 220 million, up 37% year-over-year and 8% sequentially. The annualized exit monthly recurring subscription for our RingCentral Office product grew to approximately 154 million, up 53% year-over-year and 10% sequentially. Our overall net monthly subscription dollar retention rate was over 99% in the third quarter with Office net monthly subscription dollar retention above 100% consistent with the past several quarters. Before I move further down to income statement, I want to remind you that my commentary will be focused on non-GAAP results. A reconciliation of all non-GAAP to GAAP results is provided with our earnings press release issued earlier today. Service gross margins improved to 72.1% in the quarter and for the first time passed 70% level that is typical of other SaaS software providers. This was up 360 basis points from the 68.5% in Q3 of last year and up 230 basis points in the 69.8% in Q2 of this year. This significant improvement in margins brings us closer to achieving our target margins for service revenue in the range of 75% to 80%. We are continuing to see leverage from prior infrastructure investments as well as our initiatives to lower our communication costs. Consolidated gross margins which includes phones was 66.5% up from 62.2% in Q3 of last year and up from 63.6% in Q2 of this…

Thank you. Ladies and gentleman at this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Terry Tillman from Raymond James. Please proceed with your question.

This is for Vlad or David, but in terms of the up market moves, you gave additional commentary or additional metrics on just the size now the 50 C+ or 50 user plus type deals that was helpful. But I’d love to get an update on just where we’re in terms of the size of the sales force focused on up market. And maybe the enhancements earlier in the year in terms of the sales organization. Are there still more benefits to be seen from that kind of enhancement or alignment changes?

Terry this is Dave. So we’re pleased with the growth that we’ve seen at market as we mentioned earlier the 50 plus segment is growing 100% year-over-year. The enhancements that we made to the sales force earlier this year are paying dividends and we’re very pleased with the ramps the productivities and our ability to hire more sales reps. So it’s something that we’re going to continue to do at a very productive rate.

Kind of as a follow up Dave in terms of just where you are in the traction you’re seeing with the move up market. Has it done anything to change your near-term or intermediate term plans in terms of sales and marketing investments focused on that market. For example is there any acceleration that we could see in terms of the size of the selling effort there or is it still kind of as the plan you had laid out previously?

I mentioned some of the wins that we had on the call earlier 500 user win, 700 user deployment. So we do see little bit longer sales cycles there but the deal sizes are much larger. We also seen our CAC ratio becoming more efficient over time. And if you look at that compared to the competition, it’ll show some of the efficiencies that we’re seeing.

And I guess a quick question Clyde; in terms of I know you talked about if we look at first half versus second half we will see significant improvement in the cash flow in the second half but obviously the fourth quarter expected to be negative. But in 3Q the accrued liabilities, I mean that was one of the big drivers in the quarter and maybe it’s just timing. But in accrued is there anything that was notable there like commissions or something that increased a lot to create an outlier there for that line item?

We had, if you recall the building in Denver, we had opened up a new building I think we mentioned that one or two calls ago. This was more or less the settlement with the landlord, we incur the expense and he reimburses. So that’s what you saw back then, this quarter the quarter there is just timing differences, obviously at this scale you’ll see more changes overall. But as I mentioned in the first half we lost -- cash from operations was negative 11, in the second half putting aside quarter-to-quarter things is actually materially better.

And just my last question and I’ll turn it over to others. I know you’re not giving guidance yet for ‘15 Clyde, but it is a common question in terms of the balancing of investing for growth versus showing operating leverage. Has anything changed in terms of your MO as we look into ‘15 about kind of steady quarter-to-quarter improvement in terms of that negative operating margin as we look into ‘15?

Sure, Terry, we'll provide better guidance on our next call for 2015 or guidance for 2015 we’re not doing that today. I think if you look at our trajectory of improvements. Of course, this management team is committed to doing that. The one thing I will caution people though is in Q1 because of seasonality, particularly related to payroll tax and some reset you might have an erosion off of Q4, but by and large, putting aside again quarter-to-quarter fluctuations we expect to continue to improve our profitability.

Our next question comes from the line of Kash Rangan from Bank of America Merrill Lynch. Please proceed with your question.

This is [Joyce Yang] calling in for Kash. Congratulations on a great quarter guys. I just have a question on the lifetime value per subscriber. Can you kind of compare and contrast the LTV for the subscribers required by RingCentral directly versus through the relationship with the telcos like AT&T and BT? And how does those customer acquisition cost in lifetime differ? And what is the total LTV of one versus the other if you could break that down for us?

This is Vlad and thanks for the compliment. So, customers that we’re seeing from our direct channel are similar but tend to be on a slightly smaller size than those we get from the indirect channel, again indirect being Carriers and VARs. And there is not that much discrepancy between customer profiles between VARs and carriers that we see. As it all reflect a more up market than we see from our direct business currently. Now as far as, LTVs correspondingly would be slightly higher for our indirect customers. As far as acquisition costs, I believe further consistent about this ever since we went public, we’ve tried to keep our acquisition cost and our CAC to be roughly similar between direct and indirect, and that continues to be the case. And overall, we’re quite pleased to see our CAC continuing to improve and at this point is something like six dealers it was over 60%, which does seem to be sort of in the industry led category at this point. So, we continue to see efficiencies and special as the Company matures and as we get more efficient in what we do.

One more question, so as you scale up market now. What type of customer support infrastructures are required and what are the margin implications of that?

Well, so customer support is scaling with the needs of our business. We’ve announced that we got within two quarters ago or three, but we know we did announce earlier that we are expanding our Denver operation. So, we’re certainly seeing more stringent support requirements for up market customers. But the associated cores are well offset by higher LTVs and better retention. So overall, we think it's a winning game and again I really want to draw your attention to the numbers which comply as we know. So as we are continuing sort of push up market, we are also seeing improving CAC customer acquisition cost, as well as diminishing losses. So I believe that you’re seeing that we are able to move up market, and while being more efficient at it. I would also like to add couple of things to that and again as you can see from our numbers, we also are now seeing meaningful gross margin improvements discussed to do with our increasing scale and also we’re now seeing benefit of infrastructure build out and retrofit that some of which we embarked on prior to the IPO and some of its build into this year. But we’re seeing multipoint improvement in the gross margin which as a service margin level now pulls up in the middle of the SaaS category. And finally also to note is that with larger customers another dynamic to understand is that it's really a different customer we are talking to. So with smaller customers we are talking to the business owner or maybe even the technologies but not necessarily an IT person. And with larger customers invariably there is an IT department. And frankly some of the more mundane questions they tend to not ask. So there are efficiencies there as well.

Our next question comes from the line Heather Bellini from Goldman Sachs. Please proceed with your question.

Just had a couple, a bunch were already answered I was just wondering if you could share with us more color on how the average number of user per customer is increasing as you move up the enterprise. I appreciate some of the information that you gave out in terms of that category growing a 100% year-over-year again. But just wondering if you could provide a little bit more? And then the other question I knew you’d comment on this a little bit. But just wondering when we think about the ramp of your partnerships with TELUS and BT for next year. How do you -- what type of shape, like what does the flow to the line look like for them being additive, how many quarters out do you think it takes for that to be a material driver for you all?

So Vlad here again. So let's maybe do it in reverse order. As far as our new carrier wins which is TELUS and BT, there is no slope to those acquisitions at this point because neither one has launched as of yet. TELUS is very close to going live, BT is a little bit further down the line. But we certainly expect both of them to be up and running within the next quarter or two. Now as far as contribution, this is a little bit early to tell, but our experience with other carriers is showing that it does take a while to ramp. We are dealing with as with any SaaS business, you tend to start small but then it's a base that keeps on growing and adding to as time goes, assuming good retention rate which we have been able to exhibit across all of our channels. So that's the data that we have currently at hand. I would not assign too much for let’s say 2015 to any of these new channels, but we are extremely optimistic that our investments will pay off very, very handsomely in 2016 and beyond across all of our carrier as well as other indirect initiatives. Right, so that's the one question you asked. As far as average customer count, so we or line count -- so we historically haven't been sharing that, but if you can see from the numbers the 60 plus segment is by far our fastest growing segment, vastly outpacing the rest of our business with 50 plus growing at our 100% year-over-year, and it's now around 20% of bookings which is very quite a meaningful number in its own, right. So we do feel good about it, average number is increasing and we expect to continue one of the same as we move further up market.

Our next question comes from the line of Bhavan Suri from William Blair. Please proceed with your question.

I just wanted to touch on the tax side of the equation there may be and this is for Clyde and Vlad a little bit. But have you done any analysis on what the sort of unit economic differential is between the Office products and the Non-Office or the legacy products. And then also say on the over 50 maybe even over 100 type deals versus the typical deals.

Sure, Bhavan, Vlad here. So Office versus non-Office. Look frankly our business and our future is Office. So non-office is kind on auto pilot and is still growing I have to say. Generally speaking, that CAC might even be a little bit better than with Office, but we do have a strategic decision and directive as a company to move up market and the basic simple reason for that is the fact that our market customers are stickier, so better retention. Overall, better LTV which might not necessarily be captured in the CAC itself because of retention correct, because CAC on that as the new generation. So for those reasons we continue investing in up market. It is an interesting point you are bringing, we could potentially be growing a little faster by investing more in the down market segments. We just don’t think is the right thing to do for the company overall given our strategic goals as well our drive towards overall profitability of the business.

So interesting about unit economics which takes into account retention and lifetime value the case could be made, and then I guess I could do it in a high level I just don't know the exact numbers on the split on the CAC stuff. But the case could be made that unit economics are better certainly for the office business than they are for the legacy business so to speak.

Yes, but there is couple of different dynamics. As Vlad pointed out we don't invest a lot of sales and marketing, so we continue doing a number of things here. We don't invest a lot of sales and marketing in the non-office. It’s doing really well, you can still have the growth, it has grown again, but a lot of that is self sustaining and the brand has built itself very good over the last few years. So when you look at CAC, it's a different mechanism of how we manage that. So Office is obviously a very good product, you about economics every dollar we invest in sales and marketing we get $8 of life time revenue and $5 of profit, we validate that every, we at least every quarter, we just validated that this week even as we go up market and we get better those things are still consistent. But this is different, a slightly different dynamics on the lower end, on the other products.

One other one for me. As you move up market and added a tonne of functionality analytics, obviously the conferencing, the multi-level IVR et cetera. But is there something that the customers are asking that's sort of the R&D investments you've focused around, especially as you say going forward not even 50 but multi-hundred, multi-thousand type environments.

Well this is due to inflation so if I understand right, so the question is on analytics. And as I have said this is exactly one of the directions where we’re going as far as product improvements are concerned. So, we have released an analytics package now which is specifically been asked for by customers and particular larger customers, we intend to continue enhancing our analytics capability. So there will be more customization allowed as we go along, we are building this functionality into our platform. So, we absolutely see our ability to expose to whatever is going on with a system on a per customer basis. I mean that’s a big competitive advantage and we are very much subscribed into including this part of our overall offering.

And then one last one for me just as you brought up driving competitive environment. Any change out there or any of the other players becoming a little more aggressive many of these larger players try to move downstream with sort of a price competitive offering, are you seeing any change out there?

We do not, no we don’t, it's sort of the same cast of characters. And to me the cast of characters, it’s mostly the hardware guys kind of trying to go down to their systems there, but cloud wins. From the cloud source from pure-plays as you know we are the largest and the fastest growing by far at this point. And we just don’t see people like Cisco or Avaya, they talk about a service offering as oppose to hardware, but frankly just don’t see it in the field, not with our customer base.

Our next question comes from the line of Mike Latimore from Northland Capital Markets. Please proceed with your question.

On the deferred revenue that keeps growing pretty rapidly, can you remind me just what’s driving the deferred revenues?

Obviously it's still the timing there in the quarter as we move up market what we’re seeing Mike is more and more customers paying on longer-term cost contract I think about two-thirds of our customers actually signed up for contracts from one to three years. We’re beginning to see a little bit of prepay on that but that’s not going to move the needle yet to where you see it, directionally we see that increasing but it’s more timing of when people make their payments. I wouldn’t judge too much it’s more in terms of if you look at our revenue growth it’s more in line with that.

And then your gross margin obviously improved substantially on quarter, should we view that as a new baseline kind of from a near-term perspective or could it pull back little bit?

Putting a side what I said early on potentially Q1, I think we were very pleased that it hit the service margins pass the 70% threshold, and I think you’ll see that in the 70% a seven-handle zip code going forward.

And then the conferencing application you released. Can you just give a little color on how much interest there is in that or how much use has occurred among your customer base for conference applications you released earlier in the year?

Yes we’ve seen a nice uptick in our premium offering which encompasses the RingCentral meetings of product and we find that our customers see that the value of having both the integrated experience with your phone system in the meeting. We’re seeing nice wins against some of the collaboration vendors.

And then last, I know Clyde you might not want to touch on ’15 much, but I mean do you think by the end of ‘15 you could have EBITDA positive insight there?

You are right; I don’t want to touch on 2015 much specifically that one. But we’ll address that as time goes on.

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Thank you very much for joining us today. We appreciate your interest in our company. We’re happy to demonstrate continued progress with our office business and our success with larger customers. We’re very excited about our position and opportunity in this large and growing market. We appreciate your interest in our company and look forward to providing you with further updates in the future. Thank you.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.