Good day, and welcome to the RingCentral Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would 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 RingCentral's second quarter 2024 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO, and Sonalee Parekh, CFO. Our format today will include prepared remarks by Vlad and Sonalee, followed by Q&A. We also have a slide presentation available on our Investor Relations website that will coincide with today's call. Which you can find under the financial results section at ir.ringcentral.com. Some of our discussion 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 statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as 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 is 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 website. With that, I'll turn the call over to Vlad.

Good afternoon, and welcome to our second quarter earnings conference call. We had a solid second quarter, as results were above the high end of guidance on all key metrics against this quarter. Total revenue rose 10% to $593 million, $7 million above the midpoint of our guidance. We saw good traction with our new products, in particular with RingCX, our native AI-first cloud contact center product. RingCX traction was solidly above our expectations. Importantly, we also delivered another quarter of expanding profitability and strong cash flows. Sonalee will provide more details shortly, but some key highlights include achieving an operating margin of 20.9%, which was above our guidance, driving down SBC by 5 percentage points year-over-year, and generating $109 million of leveraged free cash flow, a quarterly record. We see our business as being comprised of three major customer groups. These are large businesses or enterprise, which are customers that generate over $100,000 of ARR and which represent about 40% of our total ARR. Mid-markets, which are customers that generate between $25,000 to $100,000 of ARR and which represent about 20% of our total ARR. And small businesses, which are customers with less than $25,000 of ARR and which represent about 40% of our total ARR. Our results reflect continued strength in our core UCaaS business across all customer groups. Our enterprise business continues the trend of double-digit year-over -year growth in Q2. We're also seeing growth in the average enterprise deal size on both acquisition and upsell. We closed around 20 deals with over 1 million TCV or total contract value in Q2, which was in line with the number of such deals in Q2 2023. Importantly, the average TCV of large deals grew by 30% year-over-year. As we have seen the last few quarters, many enterprise customers…

Thanks, Vlad. I'll provide highlights from the second quarter and then discuss our business outlook for the third quarter and full year. In Q2, subscription revenue of $567 million was up 10% year-over-year, solidly above the high end of our guidance range. ARR of $2.43 billion was up 9% year-over-year. Adjusted for constant currency, ARR was up 10% versus last year. CCaaS ARR was $390 million, up 19% versus last year, with good early traction from RingCX. As Vlad noted, the number of large TCV deals was roughly flat versus last year, but the value of each deal was up on average 30%. Additionally, the value of our large UCaaS-only deals grew even faster, up over 60% versus last year. While the macro has impacted growth the last two years, we believe our business is stabilizing and our large UCaaS wins and growth in deal size are illustrative of the size of the opportunity that is still in front of us and an encouraging leading indicator of continued market adoption. Now, moving to profitability. I'll be referring to non-GAAP results unless otherwise noted. Subscription gross margin was 81%. Overall ARPU was again above $30. Our new product ARPUs are solidly higher than current overall ARPUs. Over time, as the contribution from new products grows and its penetration within our large base increases, we expect new products to become increasingly accretive to overall ARPU. Operating margin rose 160 basis points year-over-year to 20.9%, which is above our guidance. The outperformance was driven by revenue outperformance and continued discipline around spending. Sales and marketing expenses, a percent of total revenue, declined 150 basis points to 39.5%, as we drive higher sales productivity and remain focused on keeping compensation commensurate with the value created. This continues to be an area of focus for…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Funk with Bank of America. Please go ahead.

Yes, thank you for the question tonight. One for you, Vlad, kind of higher level industry structure question. Industry structure really isn't static, right? You see a number of providers add capabilities, whether it was voice or contact center left several years. You clearly expanded your own product portfolio. So love to hear your thought on why RingCentral be a share consolidator, if you believe you can outgrow the industry and if your product portfolio will allow you to maintain pricing discipline to a greater degree than we have seen? And any metrics maybe you can provide to support that would be great.

Yes, Michael, thank you for the question. So I'm sorry, just to make sure I understand, you're asking why we would or would not be shared a consolidator.

No. Why you should be, why you should be a share consolidator in ex cat with your product portfolio. And if and why you believe that can be greater pricing discipline as you add more products to the portfolio in the evolving competitive environment.

Right. I don't believe we stated that we were planning to be market share consolidated. Is that what you mean? Our goal is to continue and double, triple down on profitable growth. So in as much as the opportunities present themselves for us to accelerate growth and profitability, we will obviously keep an open mind to that and we do evaluate opportunities as they come up. But having said that, we are quite happy with our internal plan and our internal progress at this point. We are leading the market consistently in UCaaS. We are coming up strong in CCaaS. Our RigSense platform is gaining traction, and we have many happy customers, and it's now and growing very rapidly. And there are new events platform is gathering major logos. All of this is under our own horsepower.

Mike, hi it's Sonalee here. Just in terms of pricing and price discipline, obviously, you saw we disclosed ARPUs remain above $30. And just a couple of points to make there on ARPU. So we have some opposing dynamics taking place. So one is our business is very successfully shifting more to enterprise. And you've seen some really big deals we announced this quarter as well as the last couple of quarters. And obviously, with those larger enterprise deals comes slightly more discounting. So that does have an impact on pricing. But on the other side, that's been offset by new products, which in my scripted remarks, you would have heard me say, carry significantly higher ARPU. So those new products today are growing off of a very, very small base, but they will continue to ramp. And the other point I would just make there on pricing overall is we are less focused on ARPU per se and much more focused on ARPA, so Average Revenue per Account and how we drive greater share of wallet out of our 7 million plus paid seat base. And I think that's where you'll see RingCentral really focus in terms of value proposition. And just to remind you on the ARPUs around the new products. RingCX, we live at $65 per month per seat, so way above the corporate average. And RingSense for Sales is about $60 per month. But expect to see with more innovation comes higher ARPU and higher retention as well. So hopefully, that answers a bit around the pricing.

Next question comes from Siti Panigrahi with Mizuho. Please go ahead.

Great. Thanks for taking my question. You guys talked about the RingCX traction that seems to be above your expectation. So could you talk about what kind of use cases you are seeing the traction? Where do you see the sweet spot? And how do you position yourself against the competitor in this Cloud Contact Center opportunity? And then specifically Contact Center, you say see CCaaS $390 million, up 19%. How much of that growth also driven by the RingCX?

Right. So let me take -- this is the first part of the question. Look, RingCX is a modern AI first contact center. That is, first and foremost, seamlessly integrated with our flagship RingEX product. So that is -- that's a huge advantage for RingCX because as Sonalee just mentioned, we are the absolute leader in paid UCaaS seats at 7 million now accounting. And we have this very large captive base to mine to offer RingCX too. And RingCX being designed for simplicity, ease of use and deployment and those are being priced very disruptively resonates well with our existing customers as well as a number of new prospects. So again, where it's resonating is integration, simplicity, of course, our core values of reliability, security, global retube -- now we shared about the fact that it will be available internationally including via partnership with Vodafone. So I think that's the first for a product at this stage of development. So again, we feel very, very good about it. And Sonalee maybe you can take the rest of it.

Yes. So in terms of how much of the growth of that 19% is being driven by RingCX versus RCCC. We don't actually break that out. But if you consider the number of customers we disclosed and the growth that we talked about in terms of net new bookings being more than 2x quarter-over-quarter. And the customer growth being up 70% sequentially. You can see that we are very pleased and tracking ahead of where we were hoping to be. And although it's small today, over time, this will become a much more meaningful part of our overall contact center ARR. And already today, it's driving a significant portion of growth in contact center.

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great, thanks. Maybe Vlad, you noted seeing stabilization in your end markets. But just wondered if you could particularly since you were giving kind of a breakdown of the ARR by customer type, just any different trends that you're seeing between customer types or just international regions clearly seeing a lot of traction on new products, but just kind of a state of play of what you're seeing from a macro perspective?

Look, we've been disclosing by customer size or customer group. And we can see that our enterprise segment continues to be outperforming a small business. That is not surprising given the macro environment that is still particularly partnership to small business. But we are actually quite pleased with our ability to stabilize even in that segment that is currently difficult. And I fully believe that it will also return to healthier growth as the time recovers, okay? So as far as by size. As far as by geography, look, we continue to be predominantly a North American provider. But we have the existing reasons. We announced a 10,000-plus seat deal in APAC, which is our largest. So definitely, we're seeing actions there. We're getting good traction through a number of GSP partners. I think we announced a large win with Vodafone in Ireland. And as you noticed in our prepared remarks, we are well on track to be in 30 countries with Vodafone by the end of next year. So these are all very positive signs for us. And we believe that there is a lot to be done, both domestically and internationally.

The next question comes from Brian Peterson with Raymond James. Please go ahead.

Hi, guys. Congrats on the quarter. Thanks for taking the questions. So Vlad, I just wanted to spend on -- or expand on the momentum of GSP. I'm curious, how should we think about the opportunity to expand that base over time? Are there more partners that you can build with? And as we think about the percentage of ARR, what do you think that could get to over the long term?

Yes. Very good question. Look, our GSP practice is differentiated, but it's really unique. We have no other peer. This includes companies larger than us, have an enclosed to our GSP practice. I think we said we have 14 GSPs now and discount major logos like AT&T, Vodafone, Charter. Today, we've announced Cox Communications, British Dallas on Dallas, list goes on. So we already said that -- and I think this is the first time that we disclosed this that their contribution at this point, I think we said is around 10%. So that already obviously registers. And growth of that segment as a whole is actually a tailwind for us. Now this segment grows in two ways. As we add new logos, and as existing logos get our products through their channels and the sales forces, which are massive. So I firmly believe that GSP is the core asset that it is a very well defined and the defensible mode for us and that it continues to be a growth driver for us. In as much as it will be pulling our overall growth up. So I could not be happier with welcoming Cox to the family and certainly expect more business from them and us.

The next question comes from Catharine Trebnick with Rosenblatt. Please go ahead.

Thank you for taking my question. Back to the GSP, and your traditional town market, where -- you've had a nice enterprise growth here? And are you getting more opportunities going out market through your traditional channel? Or do you see this through the GSP?

Yes. Short answer is it's the former. Most GSPs are positioning us for small, medium and large but not extra-large. There are absolutely notable examples of the contrary. But if you think -- if you look at the logos that we have, say, Charter, Cox going forward. They sell to smaller and medium-sized businesses. So yes, it's for now most through direct as well as our traditional channels. So most of our enterprise leads come through traditional channel partners. But as GSPs or, by the way, they tend to be some of the world's best logos, when we count as amongst our GSP partners as they get more comfortable with our product, we are absolutely seeing possibilities to expand within each and every particular GSP within their own footprint.

The next question comes from Will Power with Baird. Please go ahead.

Okay. Great. Yes, Vlad, one of the, I guess, new announcements since your last call was the Microsoft Dynamics contact center announcement. I think you all probably have some interesting perspective. As you noted, you have a good relationship with Microsoft, that's been a source of growth working with teams providing some of the underlying network capabilities. And of course, on the flip side, you're also increasingly pushing contact center whether it's a nice partnership or your own native approach. So I'd just love to get your perspective on how you think that maybe impacts you and/or maybe the broader industry, too.

Sure. Look, it's early, and it's early for us and in a way, to speak for Microsoft, but it is a new upgrade for them as well. Look, we are very happy with our team's integration with our RingEX UCaaS product, I would absolutely not be rolling out us integrating with Microsoft's contact center or others. We do view ourselves and pride ourselves on being an open platform. Having said that, the -- one of the major benefits offering CX which is quite competitive and modern and forward-looking in every respect. In any case, but one of the main benefits when all the down is the fact that it is seamlessly integrated with RingEX, which is the market leader at 7 million paying customers. And also, it delivers what people expect for RingCentral which is reliability, security, basically I already mentioned in one of the prior answers. So we're absolutely saying that there is room to coexist with Microsoft and not just with Microsoft Teams, but with Microsoft's other products. And again, look, vast majority of contact center seats, they are still on brand. So Microsoft will get some and we will be at some and other people will get some and everyone will grow.

The next question comes from Mike Turrin with Wells Fargo. Please go ahead.

Hey, thanks for getting me in. It's David on for Michael Turrin. The sub revenue beat was actually larger than the prior six quarters. Would you mind just talking through some of the mechanics of work there and how we should think about the potential impact for the rest of the year? Thank you.

Sure, I'll take that. So yes, in terms of what drove the revenue beat, which obviously we carry through, as you saw in terms of how we guided. And you can also see what that is implying for the second half in terms of where we will end on top line and growth. But the key driver of the beat really was better than expected progress from our new products. So in particular, RingCX was above expectations. We also had another strong double-digit growth quarter in enterprise, which was ahead of expectations. And you heard Vlad earlier talk about stabilization in our SMB business, which we were really pleased about. One thing I would just mention is that overall upsell continues to be impacted slightly by macro. But on the other side of that, not only did we see strong traction and pricing with our new products, but also we saw deal sizes in the enterprise side of our business recover quite a bit. And actually, they were up 30% in the quarter. So as we look ahead, we were clear with how we guided for Q3 and you can apply the full year. We're not really factoring in any improvement or change in the macro. So it's really guiding based on what we see and the expectations we have today.

There are no further questions in the queue. With that, this concludes our call for today. You may now disconnect.