Greetings, and welcome to the RingCentral Second Quarter 2016 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 would now like to turn the conference over to your host, Darren Yip, Director of Investor Relations for RingCentral. Thank you. Mr. Yip, you may begin.

Thank you. Good afternoon and welcome to RingCentral's second quarter 2016 earnings conference call. I'm Darren Yip, RingCentral's Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; and Clyde Hosein, Chief Financial Officer. Our format today will include prepared remarks by Vlad and Clyde followed by Q&A. The purpose of today's call is to provide you with information on our second quarter performance as well as to provide you our financial outlook for our third quarter and full-year 2016. Some of our discussions and responses to your questions may contain forward-looking statements. These will include statements on our expected financial results for the third quarter and full-year of 2016, and our expected annual revenues several years out. In addition, these will include our future plans, prospects and opportunities, trends in the business communications market, and our expectations regarding our expansion internationally and up-market. We’ll also be making forward-looking statements about our competitive position, our relationships with carrier and channel partners, the expected benefits of our investment to technology, the RingCentral platform and open APIs, our products including Glip, Contact Center, RingCentral rooms and room connector, and our global office solution, our new phone distribution model, and our and our growth strategies, current and future market position, and 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; the success of our marketing, sales and retention efforts; and customer demand for an acceptance of our products and services. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. We disclaim any obligation to update 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 earnings release and slide presentation, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral. For forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail on our Investor Relations Web site. With that, let me turn the call over to Vlad.

Thank you, Darren. Q2 was another outstanding quarter with strong top-line growth and continue margin expansion. Our RingCentral office is now in almost $300 million annual recurrence revenue business, growing over 40% year-over-year, and representing over 95% of our net new business in Q2. With over $360 million in total ARR and 33% growth year-over-year, we remain the largest and fastest growing pure play cloud UCaaS provider. And we expect this momentum to continue. We aim to grow our annual revenue to $1 billion in the next four to five years. We believe we are well positioned to achieve this goal here is why; one, this market is large and underpenetrated giving us a long runway to continue to grow at a high rate; two, our rapid space of innovation allows us to maintain a technology lead over the competition resulting in a bigger share of this market; three, our expanding indirect channel network enables us to keep scaling rapidly and efficiently so to sustain our high growth rate even on expanding revenue base. To give you a bit more color, I'd like to share some thoughts with you on each of this point. First the market, the overall total addressable market remains a huge underpenetrated opportunity. We estimate this opportunity to be over $50 billion in just replacing legacy system that support only voice. This is not counting the adjacencies of team collaboration, media and Web conferencing and contact as a center service, all of which areas we participate in with very strong results to show. We do a lot of more than replace VPSs and light opadester phones. As surfavalization of the market acceleration to the cloud, we have recently seen legacy vendors change their marketing to amplify messaging around the cloud; however, practically speaking we readily run…

Thank you, Vlad and good afternoon everyone. Before I begin I want to ask that you refer to the slide deck on our Investor Relations Web site which will help summarize the key points in our call today. As well as provide some supplemental information. We had another great quarter exceeding the high-end of our revenue guidance. Q2 was underscored by 34% softer subscription revenue growth year-over-year along with strong non-GAAP results including software subscription gross margins of 80%, operating margins of 1.9 and earnings per share of $0.02. In addition, we reported our second consecutive quarter of free cash flow generation. All-in all we continue to see strong track traction with our growth drivers and solid momentum with our expansion up market. Total annualized exit monthly recurring subscriptions or ARR grew to approximately $364 million, up 33% year-over-year and 7% sequentially. The ARR for RingCentral Office grew to approximately 292 million, up 42% year-over-year and 8% sequentially. Customer satisfaction remained healthy in Q2 with overall net monthly subscription dollar retention over 99%. Office net monthly subscription dollar retention was once again over 100% as it is common for customers to adopt RingCentral office in part of their organization and increase their footprint overtime particularly with up market customers. In fact during Q2 about 40% of our new office business came from existing customers. Our cohort analysis indicates that we're yet in higher up sell from new customers as we expand up market. This demonstrates the stickiness of the RingCentral platform and the opportunity we have to land and expand deployments with customers. Software subscription revenue was 86.1 million up 34% year-over-year and 8% sequentially. Once again we had a record quarter indirect channel which contributed about 25% of revenue. Total revenue for the first quarter was 91.8 million. This…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of John DiFucci from Jefferies. Please proceed with your question.

Thank you. I have a question for Vlad and then a follow-up for Clyde. Vlad, just I want to make sure we understood your comments on the up market in your prepared remarks and in the slides it said it was your strongest sub market quarter. Were you talking about revenue, ARR, or are you talking about new business signed? And if you are not talked about new business signed can you talk about that tell us a little bit about that and how you would characterize the new business signed in the up market for this quarter?

Yes. Hi, John. Yes. Very good question. So as a matter of fact, it is about both. So firstly, it is about the fact that on a long-term basis, if you look at the ROI or efficiency of our spend in the up market, that is now our best segment. And it used to be that small business, which we define to be under 50 employees would be somewhat more efficient for us to acquire and retain those customers on lifetime value basis, but that has now switched. And this actually gives us tremendous confidence that we will be able to further accelerate our up market penetration and establish a very, very strong position in both the mid-market, which we define to be 100,000 employees, as well as true enterprise with 1,000 plus. And as you see in the global share the fact that we’re growing nicely there including several deals with over seven digits in lifetime value.

Okay. Great. And, Clyde, if I could, this is as you pointed out the second consecutive quarter of you point out positive free cash flow but also characterize that as just very strong cash flow. Can you give us a little more detail around the benefit you received in this quarter from the change in accrued liabilities?

The change in accrued liabilities I think you're referring to the transition to the full light model. In the first half of this year let's just do that way because we started the transition during Q1. You're looking at 3 million to 4 million benefit from that transition. On an ongoing basis and if you look at our guidance we should generate 1 million to 2 million a quarter on sustained basis of free cash flow. So, we're very confident from here on in we'll be free cash flow positive. We did get some benefits from the business model transition in the first half. Obviously that's not going to repeat but we expect to be free cash flow positive for the year and likely going forward.

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

Just a follow-up to John's question, Vlad, you talked about up market and I just want to just get some sense here, because always want to compare to one of your competitors, eight by eight, you guys disclosed 50-plus, and they disclose 1,000-plus metrics. Just help us understand how we reckon sill those two, how do we view that give your continued move up market and obviously the numbers you're delivering.

So, look, in fairness we wouldn't -- we look at our business the way that we look at our business which is we define small to be under 50 seats and mid 50 to 1,000 and then enterprise 1,000 plus. We do have folks out there with different measures. I think one of our competitors is talking more in terms of a 1,000 MRR per customer. Look I mean we did some of the back of the envelope calculations here and so firstly if you look at our 50 seats, that translates in excess of $1,500 MRR those versus $1,000. So, if were though just for apples-to-apples look at sort of the way that they look at it with a 1,000 plus, then and I think they're talking about 1,000 plus in the channel. So, for us a comparable measure would be actually over 70% of new bookings would fall into that category.

So, 70% would fall into north of a 1,000-plus.

And the channel, and the channel just staying with apples-to-apples but frankly even maybe more importantly than this is the fact that up market for us -- the way that we define it which is much more conservative of course, again 1,500 plus MRR versus a 1,000, that continues to grow for us in triple digits and if I have it right it's ninth quarter in the row. So, we're actually extremely proud of this. And as I just mentioned in our previous answer to John, the fact that this segment overall is now more profitable to us on a long-term basis, gives us ability to continue investment and to continue taking market share in this very-very segment.

Quick follow up. You talk about partners and put out this billion dollar four to five year target. Can you help us understand what that mix partners versus non-partners would look like four to five years out and sort of what investments need to be made on the partner side to get there? Thank you.

Let me take may be the first part of it. So, look it's obviously a little bit hard to predict the specifics four to five years out, but I really do want to reiterate that partners or indirect channel for us is of critical importance, it really does give us a way to scale up extremely cost efficiently and gets us into some very interesting deals. I already mentioned in my prepared remarks, we now have customer with over 4,000 seats that would go to us by one of the carrier partners and they stared out as 50 or 66 customers to be begin with. To be clear, we're growing both our direct and indirect capabilities. I mentioned that we have substantially revamped our go to market. We have very, very strong additions to our team, new CMO, new Head of Enterprise, new Head of Product Services just a few name of few. So we're clearly investing in this area, but channels are also very-very important. And look at the case and point one of very nice win last quarter was Santa Clara School District and this was 1,700 users already and that came through the channel. So we feel that both of them will grow, I love to be in this type of race. Let's see who wins, but one way or other we should feel very-very confident that four to five year we're talking $1 billion plus in revenues and looking as a next milestone by then.

Our next question comes from the line of George Sutton from Craig-Hallum. Please proceed with your question.

Thank you. Hello, guys. Nice results. So I found the $1 billion view very interesting, and I wondered if you could just give us a sense of how you thought about presenting that today. Obviously the IRR on that would be 22% to 28%, depending upon if it is four to five years, and I'm curious if you're looking at that as purely organic?

We haven't -- okay I'll take that. We haven't said but it's organic or not, so we have comment whether it's organic or not, but to your point before about the implied growth rates we've been growing 30% of that over the last few years. You can draw your own conclusions whether we need to be -- do that organically or not, but we are not making any statement whether it's organic or inorganic.

But typically -- yes that's completely agreeable, but Clyde said, look we're not saying that we're this number that we're not saying that we're going to grow and do a major acquisition, I am not saying we are going to do a major acquisition, but in our calculations and in our decision to now start talking about this type of milestone we have not factored in us acquiring revenue. Of course as you know we have had one acquisition so far already which is a technology acquisition, I would not allow that we would have more let's call them tuck ins -- technology tuck ins as we grow fully expect to leverage these types of new technologies to our advantage. As you know our Glip acquisition has been extremely successful we have several major accounts to show for it including Columbia University including Boston few others and it's -- so more we will see more of the same. But again no major acquisitions baked-in in the $1 billion target.

And just to be clear I love the message of laying up $1 billion. As a follow up on the Google relationship, I found it very interesting you’re already seeing opportunities brought to you through that relationship. Can you just give us a little better sense on what the opportunity is specifically with that relationship?

Sure. So, look, at the high level, there are -- it's very clear that many more than that I would think sequentially all businesses will migrate to the cloud. They will migrate all of the vertical IT functions to the cloud and a number of major companies have emerged Salesforce, NetSuite and recently acquired for a net value a whole number of others, Workday yes, so all of this stuff is moving to the cloud. Communications is moving to the cloud. As you know, we’re losing that charge. But business productivity software itself is moving to the cloud. And of course Microsoft itself has been out with Office 365. Google has Google Apps, which is doing pretty well in the market as you know. And basically make long to the short, if you take Google Apps and you combine with RingCentral Office then you do have a full app productivity suite that’s ready to use today. And we already have customers jointly. We’re cooperating on the go to market strategy. We were one of the very few partners as they’ve announced with their first joint GTM initiative. I believe that was in Q1. And we’re already seeing some wins together. So we are hoping that there is going to be more to come. But again at the very high level, it does seem to be quite synergistic between what they have to bring and what we have.

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

Thanks a lot. Excellent quarter there, guys. On the other revenue line, should we assume that there is going to be a sort of stable range there over time, or is that going to grow a little bit? Just trying to figure out what that means for the other revenue line?

Thanks Mike. This is Clyde, I’ll take that. With the transition to the new model it should just stabilize but what’s in there includes prof services, the commissions from the agency model. And so as the business grow that would grow especially as you go up market, as you go up market prof services will grow, the commission revenue should grow. So, the way to think about it is grow it in line with the subscription revenue.

And then just curious on the contact center application, how is demand for that in the quarter?

Well, we haven’t broken out those numbers separately yet. But we’re seeing continued strong demand. I’ve mentioned a few specific wins we’re having. It’s an important part of the portfolio. You do have businesses that we know unify there, you know, communications in the cloud, as well as with the cloud contact center. And we feel, we have a very compelling offering out there.

Our next question comes from the line of Nikolay Beliov from Bank of America. Please proceed with your question.

Hi, thank you for taking my questions and congratulations on nice performance in the quarter. My first question is around the $1 billion target. How do you envision domestic versus international split. Now we have international revenues that are beginning to grow but still minimal. And secondly, how close do you think you’re going to be or at the operating margin target the long-term operating margin target you laid out during the IPO?

Okay. Let the take the first part, and then we’ll let Clyde address the margins question. Look, on domestic versus international, again those are the same, hard to predict the specifics four years out. But what I do want to reiterate is that, we’ve been extremely successful with our global office approach, and what this allows us is to address international businesses in the quarter in a cost effective manner. So what global office is just as a quick recap, is we are going after U.S., UK and Canadian companies, who are headquartered in these regions but have international presence. And we are able to provide full native fully homologated in-country support and presentation to those employees who are international, while combining everything under a single invoice and also offering very seamless intra-company presentation to those employee basis. So this has been great for us. It has been very much instrumental in a number of wins, Box is a prime example just recently where we’re being employed internationally and we would not have account without very strong international presence. So we definitely are going to continue with this. As far as in-country presence is concerned. I’m sure it will come. But frankly U.S. headquartered, UK, again at the headquarter company is just a huge, such a huge portion of global GDP we think there is a very long run rate there. But again please do not read this as, no we are not going to expand beyond global office. We are planning to, we will. And do remember, that what we are able to achieve with global office infrastructure wise translates and leverages exactly 100% towards full international in-country presence. Clyde, you should take the margin.

Nikolai, the question on margins, it depends on our growth rate at the time. Is it high growth rate or moderate growth rate, so that’s point number one. As you know very well, margin is a function of investment and sales and marketing to grow, which is your classic SaaS model and we are on the classic SaaS model now. So our gross margin is at high end of our original target range referred back to the highest IPO. So we’ve achieved the highest, the high end of that range. We are in the range in irony G&A has probably got a point or two to improve. So it really comes down to a function of growth rate and of sales and marketing investment. So in five years from now or the billion dollars, when we get there four to five years, we see the same opportunity we see today and of course we will communicate with investors and get feedback from investors but if the opportunity still is there, if the unit economics is there, then it likely make sense for us to continue that. But we're committed to the long-term targets of 20%-25%. The question is at what growth rate and what opportunity we're going after.

Our next question comes from the line of Terry Tillman from Raymond James. Please proceed with your question.

One of my questions has been answered but I guess Clyde maybe a question for you in terms of cash flow, it was strong and actually what follow through in the full guidance on free cash flow. What I'm curious though in the second quarter you did say something about benefits from cash collections from carriers. Maybe you could quantify that and how much of the strength in your cash flow or the outlook is based on some sort of positive shift to annual prepayment?

So, a couple of things, so the carrier piece of it, it's more timing and literally these things are whether it's March 31st or April was about 1 million to 2 million was the benefit from carriers. As to the benefit on prepay, our prepay went up from I think 31 million to 39 million, not a meaningful amount, that's a year-over-year number. So, we'll see that improving overtime, that is a function Terry as we move up the larger customers, you'll see more and more deferred revenue on the balance sheet which of course helps the cash flow. So, that's going to be a tailwind for us as we go forward and we I would say we expect that to continue to improve as you've seen it improve over the last year.

But Clyde in terms of the full year update on free cash flow, is there anything in there that speaks of a major step up in how much do you get from a customer for 12 months upfront or is there really nothing baked in that speaks of a big step up?

No. In terms of the forecast for the year I think we've explained in the first half and earlier I think a question from John we talked about some of the onetime benefits we got. But then ongoing basis no there's no assumption of a specific step up, this is ongoing basis as we see it today, we probably generate 1 million to 2 million of free cash flow a quarter or maybe a little better than that.

Our next question comes from the line of Barry McCarver with Stephens. Please proceed with your question.

Hi guys this is Will for Barry. Congratulates on a good quarter, most of my questions have been answered, so I'll just be brief. Given some of the peers in the space, focused on the middle market, have been involved in some M&A activity, have you gotten any feedback from your channel partners and seen any uptick in business maybe from some concern there?

Well look I mean yes, there has been some activity in the space and also remember we are in multiple spaces here, we were, yes, we started out as the UCaaS leading that segment but we do more than just voice, as I already mentioned. So, but the equation, how do I say I mean the numbers speak for themselves, our customers and our partners seem to be pretty happy with our product mix as it exists now. We're clearly taking our fair share, some people say more than our fair share. And it just speaks to the strengths of the technology that we have, we own and have developed and are operating most of it ourselves but not 100% and whatever it is that not us has been very well integrated and rising infrastructure and so forth if I understand the question. So we feel we're in the right -- in a pretty good position here.

Our next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Thanks for taking my question today and congratulations on a very strong quarter. Most of my questions have been asked, too. But I wanted to ask you something that hasn't been asked today, and it is an area in a category that you're not in today, but it seems very adjacent to what you're doing and certainly gathering a lot of attention in the market and investment community, and that is embedded communications in applications. And I just wanted to get your take how you could be thinking about that opportunity and that category in the future, and if that's maybe a category that you could either build or acquire or even use your open platform and your ecosystem to partner with and just because it is gathering so much attention these days on the street, just wondering how you guys are thinking about the opportunity in the embedded communications and applications category? Thanks.

Yes. Yes that is an interesting one. Look, so certainly thank you for noting that we do have an open platform, we do have a rapidly growing ecosystem. As you know our approach is a little bit different in that we make our platform and our APIs available to our customers and partners. And this it is more along the lines of let's say salesforces out of change, so we think it's a good model. So I would say that technology wise we're there, if you're a customer of ours you can very much embed communications into your work flows and make them actionable. And a great example is Columbia recently utilized our platform to automate in a very critical task of handling 9/11 notifications. So certainly our platform is well capable of providing those types of capabilities. As far as the rest of it, look future will tell we're like the sort of predicable recurrence revenue nature of our business, we've mentioned several times I think overtime how much of next quarter's revenue is really already on the books and spoken for by the end of every quarter. And we like that and we don’t want to chase shiny objects necessarily or unnecessarily. But having said that, we're always like keeping our eyes open and as this market develops and matures we'll see what happens. But again for now we're happy where we are with our connect initiative which just to reiterate is to the best of our understanding is ahead of any direct competitor who is also into recurrence revenue UCaaS business.

Our next question comes from the line of Jonathan Kees with Summit Research Partners. Please proceed with your question.

Thanks for taking my question. I'll start with the follow-up. In the past you've talked about AT&T and being a 10% customer. I didn't hear that, were they 10% customer, I notice you talked about TELUS and BT and some of the carrier sales that have taken place. Was AT&T a 10% customer and if so, what was it?

Yes Clyde, do you want to take that.

So the question, I am sorry could you repeat the question?

I am sorry was AT&T a 10% customer and if so, what was it?

The last under confidential agreement with AT&T we disclosed these once a year as of our 10-K it was 13%.

So you're not worried -- no concerns or no major shifts in terms of your AT&T activities?

Look, AT&T has been a strong channel partner of ours for, if I remember right, around five years, maybe over five years. So, we are seeing continuous strong performance from the channel overall and from carriers as part of that channel. We’re adjusting as per client where adjustments are in position to report to on any specific carrier customer on quarterly basis. But I will again reiterate, numbers speak for themselves, and obviously there has been quite a bit of right now announcements and whatever in the field. You can look at our growth and look at the fact that we are beating our guidance and raising our guidance at this point.

And Jonathan I would just add our carrier our overall revenue from carriers grew in the quarter, that’s as close as we can give you.

We have time for one last question. Our last question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

I just wanted to kind of follow-up on the carrier point and get a sense of you added a lot of indirect partners over the last year and specifically the last quarter. And just get a sense if you think that indirect channel partners outside of Telco will end up being ultimately the biggest driver of indirect growth, or whether you still think telcos will be a healthy driver of growth. And following up on that, you had said in the past that it would take a kind of similar amount of time to ramp BT and TELUS to be as successful as AT&T have been and I want to get a sense of early feedback on that as to whether it will still take a multi-year process to get those to be meaningful customers, or how do you think about that? Thanks.

Well, let’s start in reverse. Look so, firstly there are absolutely all meaningful customers. They’re all fantastic brands we’re very fortunate to have three major carriers these are in RingCentral, no other UCaaS provider has any frankly. So, we’re good. So having said that, yes, it will take time that is the nature of the current revenue business. So we’ll stick with that story, and you also have to remember that AT&T is meaningfully larger, certainly than telcos. And we are also growing quite rapidly and just like Clyde’s comment is we have very, very strong confidentiality agreement and restrictions with each of these partners. So we report as we are obligated to at the 10% threshold, but I’d like to point out that given our $1 billion target 10% is $100 million. So we feel that we have numerous factors to get there, carriers being very important. But certainly by no means the only one, and the channel will work, and we’ll get there with the combination of all of these.

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

Sure. Thank you. Look, firstly thank you all for your time for calling in. I would just like to reiterate we had a very strong quarter and, yes, we’ve had, the industry leading performance and growth for quite some time now. But what really gives us additional spring in our steps is the fact that our up market continues to develop, continues to grow extremely well. Now we are clearly outselling competition across the board in multiple segments including up market itself. We do expect this momentum to continue. And really I’d like to maybe end at this point in the end great companies are made of great people, sure you’ve heard this before. But in our case we had a pretty good team, but now we have truly a world class team with our recent hires. I would imagine that some of you will have a chance to meet many of them in the foreseeable future. And we feel very, very strong about our ability to get to this $1 billion mark and break through and move forward. So again just thank you for taking an interest in our company and onward and upwards, as they say.

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.