Inogen Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2024

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to the RingCentral 4th Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Will Wong, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to RingCentral's 4th quarter 2023 earnings conference call. Joining me today are Vlad Schmidis, Founder, Chairman and CEO and Sonali Parekh, CFO. Our format today will include prepared remarks by Vlad and Sonali followed by Q and 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.

Speaker 1

Ringcentral.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 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.

Speaker 1

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.

Speaker 2

Good afternoon and welcome to our Q4 2023 earnings call. First, I'd like to welcome 2 new Board members, Ned Segal and Prabh Bat to the RingCentral family. Ned is a seasoned executive with more than 25 years of technology, finance and capital market experience, including Twitter, Intuit and Goldman Sachs. Brad is an accomplished technology industry veteran and financial expert, having served as the Chief Accounting Officer at Cisco Systems for over 20 years. I look forward to working with Zampos.

Speaker 2

I also want to warmly thank Alan Sigerson for his 9 years of service on our Board as he will be transitioning off the Board in Q2. Now moving to our results. We ended the year on a strong note. In Q4, total revenue rose 9% above the midpoint of our guidance. ARR rose 11% to $2,300,000,000 We also achieved record profitability with quarterly operating margin of 20.5 percent and free cash flow of nearly $100,000,000 well above our outlook.

Speaker 2

Our strong finish to 2023 positions us well to execute on our strategy in 2024 and beyond. I return the CEO to deliver on our strategy of: 1, delivering durable growth and value from our core 2, expanding our TAM by turning RingCentral into a multiproduct AI first communication provider. To that end, we have recently added 3 new products to our portfolio. RingCX, our native AI first contact center RingCentral Sales, our conversation intelligence platform for sales professionals and RingCentral Events, our new virtual, vibrant and on-site events platform. And 3, driving continued robust free cash flow generation while materially reducing SBC and maximizing free cash flow per share growth over the long term.

Speaker 2

Our right to win is rooted in our industry leading reliable global fully featured business communications platform that now includes cloud PBX, cloud contact center and video meetings, webinars and events, all infused with state of the art AI capabilities. As a testament to our industry leadership, in November 2023, RingCentral was named a leader in the Gardner Magic Quadrant for Unified Communications as a Service worldwide report for the 9th consecutive year. And we're excited to report that Aragon Research, an independent third party research firm just named RingCF as the leader in the intelligent contact center for SMB. We believe this is a testament to RingCentral's ability to continue delivering a superior differentiated solution in a competitive market. We are proud to build a $2,300,000,000 return on revenue business that is growing profitable and serves over 400,000 customers across enterprise, mid market and SMB.

Speaker 2

Within enterprise, which we define as customers that generate $100,000 in ARR or more, I am particularly proud to report that this segment has just achieved $1,000,000,000 of ARR. This is a major milestone for our company. In fact, in this post COVID world, enterprise continues to be a strong growth driver for us. Today, we count almost 20% of Fortune 1,000 companies as our enterprise customers. Among these are 2 of the world's 3 largest hotel brands, 1 of the world's largest car rental companies and many leading Fortune 500 Financial Service Companies.

Speaker 2

Notably, the majority of our enterprise customers utilize our solutions integrated with and alongside Microsoft Teams. This strong presence with large customers and within the Microsoft Teams environment is a testament to the trust our enterprise customer have in our products and our ability to add value to the Teams environment. Our new advanced integration with Microsoft Teams is a key reason enterprise customers select RingCentral. This includes customers such as Republic Airways, one of the largest regional airlines in the U. S.

Speaker 2

Overall, enterprise continues to be a growth driver for RingCentral with a positive long term outlook. Let me now share some additional highlights of why customers large and small continue to choose RingCentral to power their communications. Broadly speaking, customers have historically picked us because of our 99.999 or 5.9 reliability, which we achieved for the 22nd straight quarter. Robust feature set, regulatory compliance and depth and breadth of our integrations. Here are some examples of key large wins and expansions for this quarter.

Speaker 2

One is the Fortune 100 insurance provider that purchased 20,000 UCaaS seats to connect its distributed broker network made up of 1,000 for field purposes. Another one is the Global 500 retailer that purchased 18,000 UCaaS seats to power communications across its more than 2,000 stores. And finally, a Fortune 500 Global Healthcare Solutions company that added 1,000,000 of dollars to their existing contract. One of the key integrations for this customer is our reliable and powerful calling capabilities embedded in Microsoft Teams, which they have already deployed to their employees. Their additional spend is a testament to their confidence in our ability to deliver a full communications platform and add value to the team's environment.

Speaker 2

Leveraging our core strengths, we are now expanding into adjacencies such as CCaaS, hybrid and virtual events and Conversational Intelligence for Sales. These categories have addressable markets that more than double our current opportunity to over $70,000,000,000 providing multiple vectors for us to drive long term profitable growth. Industry analysts and customers alike are already recognizing our ability to deliver in one of our key adjacencies, mainly CCaaS. In the latest report, Allergan Research brings CX's ability to deliver powerful AI functionality, which includes automated quality management, coaching and conversational analytics. While being easy to deploy, easy to use and easy to maintain and all at a disruptive price point.

Speaker 2

Regarding customers, we now have over 100 paying BringCS accounts, up from about 50 when we launched in November. These accounts include 214,000 Enterprises who each purchased over 1,000 kits. We also now have hundreds of paying RingCentral for sales customers after having just launched in the second half of twenty twenty three. Lastly, approximately 6 months ago, we acquired Hopin Events Business. We are happy with this acquisition and view it as a key addition to our portfolio.

Speaker 2

Since relaunching at RingCentral Events, hundreds of customers have hosted virtual and hybrid events on this platform in the past few months. This includes many large Fortune 500 companies and well known businesses such as Spotify, Reddit and HubSpot. We continue to see strong demand for our Events platform. With recent improvements in packaging and pricing and the addition of AI powered features for events, we expect to significantly scale this business over time. Notably, we recently won Harvard University over a well known video first competitor.

Speaker 2

Harvard chose us because of our advanced branding capabilities, level of production and superior F and D user experience. While it is still early for our new products, given the level of traction we're already seeing, we believe we can achieve at least $100,000,000 in ARR from RingCS, RingCentral and RingCentral events collectively by the end of 2025. We expect these new products to be meaningful contributors to our strategy of delivering long term profitable growth. Importantly, going forward, our multiproduct strategy will be augmented by taking an AI first approach to everything we do. AI is revolutionizing the way the world works and communicates.

Speaker 2

The pace of AI innovation in our industry is accelerating. We have a robust roadmap of new AI best features that should help differentiate our core and new product from the competition. Over the course of this year, we are planning to announce many more AI rooted innovations that will enhance both employee and customer experiences. Stay tuned for some exciting product and innovation announcements at Enterprise Connect at the end of March. We will leverage our broad go to market capabilities as it is on our AI first multi product strategy.

Speaker 2

In that vein, I am pleased to welcome Brightspeed, formerly known as CenturyLink, who will join other valuable members of our global service provider family that now includes AT and T, BT, Charter Communications, Telus and Vodafone amongst others. Speaking of Vodafone, we started with Vodafone UK in Germany and in 2023 we expanded with Vodafone into Italy, Portugal and Spain. And we're super excited about the recent enterprise win with Vodafone landing a 15,000 seat deal at IKEA, Germany. And last but certainly not least, profitability. We have greatly expanded our profitability with operating margins improving from 12% in 2022 to over 20% exiting 2023.

Speaker 2

We also more than doubled our adjusted unlevered free cash flow to $325,000,000 for the year. We continue to expect to guide further margin expansion and robust free cash flow generation in 2024 and beyond. Another important factor in creating shareholder value is minimizing SBC. I and our entire senior management team and the Board are laser focused on and committed to delivering meaningful improvement in 2024 and beyond. Sonali will provide more color shortly.

Speaker 2

In closing, we exited 2023 as a stronger, leaner, more profitable business and we are well on our way to becoming an AI first multiproduct portfolio company. Our opportunity is large, our strategy is clear and we're head down executing. I'm optimistic about our future and I'm happy to be back at the helm leading RingCentral's next chapter. With that, thank you and let me turn the call over to Sonali.

Speaker 3

Thanks, Vlad. I will now provide highlights from the Q4 and full year 2023 and then discuss our guidance for 2024. In Q4, subscription revenue of 547,000,000 dollars was up 9% year over year, above the midpoint of our guidance range. ARR of $2,330,000,000 was up 11% versus last year. Our enterprise ARR grew 13% versus last year to 1,000,000,000 dollars We saw good traction in our 1,000,000 plus TCV deals.

Speaker 3

We finished with a seasonally strong Q4, resulting in over 100 large deals for the year. Within SMB, ARR rose 9% versus last year and mid market ARR grew 10%. And we believe the demand environment has begun to stabilize. Moving to CCaaS. Once again, we saw more than 60% of our large $1,000,000 plus TCV deals include both UCaaS and CCAS.

Speaker 3

CCaaS ARR now represents over $350,000,000 of our total ARR base. Now moving to profitability. I'll be referring to non GAAP results unless otherwise noted. Subscription gross margin was 82%, consistent with prior quarters. Overall ARPU was again above $30 Additionally, we are seeing good traction with our new products.

Speaker 3

We have already sold thousands of Ring CX and Ring Sense for sale seats at ARPUs that are higher than our corporate average and expect new products to be accretive to ARPU and retention over time. Operating margin of 20.5 percent above our guidance for 20% rose 6.50 basis points versus last year. Our focus on increased efficiency and productivity and the significant operating leverage in our business continues to drive the meaningful increase in our profitability. Importantly, we generated quarterly adjusted unlevered free cash flow of 97,000,000 dollars a quarterly record. Moving to our balance sheet.

Speaker 3

In December, we repurchased $253,000,000 nominal value of our 2025 convertible notes for approximately 240,000,000 dollars During the quarter, we also repurchased 2,100,000 shares at an average price of approximately $31 Now turning to the full year, let me share a few key takeaways. 1st, we delivered growth that was above the market. 2nd, we meaningfully transformed our profitability and free cash flow generation profile. 3rd, we executed against our capital allocation policy that includes debt reduction, share repurchase and investing in innovation, both organically and inorganically. Now let me provide some more detail about each.

Speaker 3

First, regarding growth. Total revenue of $2,200,000,000 was up 11%. We began to see stabilization of demand in the second half of 2023. 2nd, profitability. We added over $210,000,000 of incremental subscription revenue in 2023, while keeping our operating expenses roughly flat.

Speaker 3

This was driven by the reduction in sales and marketing expense,

Speaker 1

which as

Speaker 3

a percentage of total revenue declined 3 70 basis points versus last year as we optimize our marketing spend, increase the productivity of our sales teams and continue to be disciplined in compensating partners based on the value they create. This resulted in operating margins rising 6 70 basis points versus last year to 19.1 percent and adjusted unlevered free cash flow margins increasing from 5.2% to 14.8%. Regarding free cash flow, we generated $325,000,000 of adjusted unlevered free cash flow for the year, which exceeded the midpoint of our guidance by roughly $30,000,000 The significant increase in our free cash flow reflects our increasing profitability as well as efforts we have undertaken to optimize upfront channel commissions and improve our working capital efficiency. Lastly, we executed against our capital allocation policy that we had previously shared. In 2023, we strengthened our balance sheet as we repurchased 839,000,000 of our 2025 convertible notes and $41,000,000 of our 2026 convertible notes at a meaningful discount and we were able to reduce our gross debt by over 90,000,000 dollars We exited the year at 2.6 times net debt to adjusted EBITDA, down almost 2 turns compared to 2022.

Speaker 3

We also repurchased roughly 10,000,000 shares for $315,000,000 or approximately $31.50 per share. Our Board increased our repurchase authorization by $150,000,000 and we currently have $200,000,000 remaining on our total authorization. Lastly, we acquired an events platform from HOPWA, while continuing to invest in the development and launch of many new products. We accomplished a lot on the financial front in 2023. In 2024, our priorities are to 1, invest in the business to drive growth 2, expand profitability by remaining disciplined with our spend and focused on increasing efficiency and productivity 3, significantly reducing SBC expense and net share dilution.

Speaker 3

And 4, continue to deploy a capital allocation approach centered around deleveraging, share repurchase and both organic and inorganic investments. Let me now expand on each of these priorities. 1st, investing in our business to drive growth. Growth in our core business remains stable as the U. K.

Speaker 3

Market is large and continues to expand. Additionally, as Rod noted, we expect new products to meaningfully increase our TAM and contribute at least $100,000,000 of ARR by the end of 2025. 2nd, expanding profitability. Going forward in 2024 and beyond, we believe we can continue to grow revenue faster than operating expenses. We will continue to focus on increasing sales and marketing efficiency.

Speaker 3

This includes increased discipline with commissions paid to sellers and channel partners and reallocating resources to where we see the highest ROI. 3rd, and very importantly, SBC. As Rob noted, the senior management team and the Board are laser focused on reducing stock based compensation and dilution. We expect to reduce net new grants in 2024 by over 50% from 2023 levels. This results in total stock based compensation coming down by approximately 3.50 basis points in 2024.

Speaker 3

We expect further meaningful improvement in 2025 and beyond. Finally, executing against our capital allocation priorities. Addressing our 20252026 converts is a key priority. $161,000,000 of the 2025 converts remains outstanding at December 31, 2023. We plan to utilize a portion of our free cash flow to retire the 2025 convert by its maturity date in March 2025.

Speaker 3

Based on our 2024 guidance and deleveraging post paydown, our net leverage ratio will trend closer to 2 times. Our low and improving leverage ratio, strong BB credit rating and strong free cash flow growth gives us numerous options for fully addressing our 2026 converts prior to maturity. Beyond addressing our converts, we will allocate our free cash flow to investments with the highest return. This includes organic and inorganic investments and share repurchases, where we see an opportunity to take advantage of the dislocation between how the market currently values us and the inherent strength of our business. We expect all these actions will drive significant growth in our adjusted unlevered free cash flow per share of approximately 25% in 2024 and to allow us to reduce share count in the intermediate term.

Speaker 3

Now let me turn to guidance. Embedded in our guidance is the expectation that the macro environment and current business trends remain stable with no further improvement or deterioration in conditions. For the Q1 of 2024, we expect subscriptions revenue growth of 8% to 9%, total revenue growth of 8% to 9%, non GAAP operating margin of 19.5 percent non GAAP EPS of $0.79 to $0.80 We also expect to incur restructuring charges of roughly $5,000,000 to $7,000,000 in Q1 in connection with the reallocation of resources to our new products such as Ring CX and RingSense. For the full year 2024, we expect subscriptions revenue growth of 8% to 9%, total revenue growth of 8% to 9%, Non GAAP operating margin of 21%. This is up 190 basis points versus 2023.

Speaker 3

Stock based compensation as a percentage of revenue is expected to be approximately 16% at the midpoint in 2024 and down from approximately 20% in 2023. We are also targeting a further meaningful improvement in stock based compensation as a percentage of revenue in 2025 beyond. We expect non GAAP EPS of $3.50 to $3.58 dollars Lastly, we expect an adjusted unlevered free cash flow margin of 17.5 percent or $415,000,000 to $420,000,000 This represents a roughly 300 basis point increase versus 2023. In summary, 2023 was a year in which we delivered above market top line growth, while achieving record profitability and free cash flow. Building on the significant margin improvement we achieved in 2023, we expect operating margins and free cash flow to continue to expand, all while reducing stock based compensation.

Speaker 3

This is reflected in the over 600 basis point combined improvement in SBC as a percentage of revenue and free cash flow margin that we have shared in our guidance. We have put in place a strong financial foundation, and I believe we are set up well to deliver on our strategy of multi product growth and expanding margins in 2024 and beyond. With that, let's open the call for questions.

Operator

We will now begin the question and answer session. Our first question today is from Meta Marshall with Morgan Stanley. Please go

Speaker 4

ahead. Great. Thanks. Maybe, Vlad, you could just speak to given some of you stepping back into the CEO role, just whether there were any change in objectives between kind of different management that has been in the role over the last 6 months? And then maybe just on Ring CX, clearly, you guys are seeing a lot of traction with new customers.

Speaker 4

Just any initiatives to sell that into the installed base or is that largely being sold to new customers today? Thanks.

Speaker 5

Yes. Hi, Meta. Sure. So look, has there been changes? Look, the new management, as you say, has been around for a few months.

Speaker 5

So, obviously, we're a large company, and whatever momentum was carried into that period continued. But I would say that with me coming back and taking a fresh look at things, I think that you can expect a little bit more focus on technology and innovation. I think as you saw in the prepared remarks, there is renewed focus on becoming a multi product company and new product introduction. So you can expect to hear the word product from me a little bit more often than maybe from the prior management here. And there is continual concentration and focus on profitability and profitable growth.

Speaker 5

So that is not going to change. Another one is that I want to highlight is, I think there was some maybe confusion a few months ago about RingCentral, call it, retreating back into SMB. That is not what my plan is. RingCentral, our origins were indeed with SMB, but we've spent better part of the last decade in expanding from SMB to an all market company, including large enterprise. As you heard today, it is now a $1,000,000,000 business.

Speaker 5

It's not $1,000,000,000 It's not something that most people would walk away from and neither am I. And in particular, in the enterprise, it continues to be a growth vector for us. So it grows faster than the company overall. And we are extremely pleased with the traction we're now getting within the Teams ecosystem. And as you've I believe on prepared remarks, you've heard that we count 20% of Fortune 1000s amongst our enterprise customers.

Speaker 5

So to be clear, it means that not you have 1 to 10 seats in a large company, but that these are $100,000 plus ARR deals. So these are real users. And over half or I think we're saying close to 60% of it are actually Teams users. So this gives me really great hope that that segment will continue to perform.

Operator

The next question is from Citi Panagrahi with Mizuho. Please go ahead.

Speaker 6

Hi. Thanks for taking my question. Sonali, very impressive margin expansion and cash flow generation. But if I look at your top line growth now decelerating from 11% to now high single digit in 2024. So what needs to happen or is there a possibility for you to get back to this double digit growth?

Speaker 6

And what are the key assumptions or driver for growth in this year that you embedded in your 2024 guidance? And what sort of conservatism are baked into the guidance?

Speaker 3

Yes. Hi, C. T. Firstly, thanks for your comments on profitability and free cash flow. And secondly, great question.

Speaker 3

I'm glad you asked it. On top line, I think it's really, really important for me to address this. We did take a deliberately conservative approach to the way we guided on revenue for this year, because there is still some macro uncertainty out there. I mean, we're all seeing it. I think if you look across all the software companies that have reported up to now.

Speaker 3

And because of that uncertainty, we wanted to be prudent in the guide. And what I would say is we're being very prudent. And I do believe strongly that we can drive back to double digit growth. This is not an aspiration. This is something we can realize based on the very strong building blocks we have that are in place already today.

Speaker 3

You've heard from Vlad, but I'm going to talk about new products as well. Customer and analyst feedback we're receiving from our new products gives me a lot of confidence in our ability to scale these products to at least $100,000,000 of ARR by the end of 2025. And that will have a very positive impact on our upsell, which you've heard me call out in the past has been impacted by the current macro environment. But as the macro improves, we do believe these will be important tailwinds, several percentage point tailwinds to our growth. So together with the incremental growth from new products and the reacceleration from the core as a result of improved retention, we think that those are key catalysts to getting growth above the high single digit or 9% that you talked about just now.

Speaker 3

In terms of margins, just one other point I want to make is that the margin expansion for 2024 that I've guided to, which is 200 basis points, it would have been higher. However, we've made some investments in the business in 2024 to drive growth in new products, including around demand gen and customer and channel incentivization. But also, we have made a deliberate decision to shift a portion of our stock based compensation to cash. So both of those elements together resulted in about a 200 basis point headwind to operating margin. So it would have been that much better in terms of the guide.

Speaker 3

And we expect to be able to continue to deliver annual margin expansion this year, next year and beyond that due to the operating leverage in the model.

Operator

The next question is from Terry Tillman with Truist Securities. Please go ahead.

Speaker 7

Yes, well, thanks for all that extra color there Sonali. Hi, Vlad, Sonali and Will. Just my multipart single question is just first on the $100,000,000 target for ARR at the end of 'twenty five. I'm just kind of curious from here to there. I mean, are we talking like $25,000,000 or $50,000,000 in 'twenty four?

Speaker 7

Just trying to understand how much of a deepness we're going to need into 'twenty five? And then the second part of this question is on enterprise ARR, even with the conservatism, should we assume comfortable above 10% or maybe even low teens enterprise ARR growth? Thank you.

Speaker 3

So in terms of the actual $100,000,000 target that we've set, I mean, we will certainly look for opportunities to give you milestone updates to that. But again, just maybe on the conservatism point, we feel that is a very achievable number. And that will be mainly driven by RingCX. That will be the lion's share of it, but we think that we will continue to deliver across all the new products that we've introduced in the last quarter or so. And I think importantly, when we thought about our guidance, we decided to specifically be very conservative on the ramp for 2024.

Speaker 3

So expect to see much more of to hit in 2025 and beyond. So I'd say really, Terry, that like second half of twenty twenty four and then certainly in 2025, very, very strong contribution.

Operator

The next question is from Ryan McWilliams with Barclays. Please go ahead.

Speaker 7

Thanks for taking the question. Great to see the year over year revenue growth implied in the Q1 similar to the Q4. So where are we overall in terms of the macro? Like are you starting to see bookings conditions improve generally? And do you see any changes in linearity, like the things get better at the end of the quarter?

Speaker 7

Thanks.

Speaker 3

Yes. So on linearity, great question. So you've heard me the last couple of quarters talk about seeing bookings much more back end loaded and it was quite exaggerated in the last two quarters and particularly in that final month of the quarter. The way that we've guided for this year is really assuming no change to that linearity. So that's more back end loading.

Speaker 3

However, we have seen some stabilization in some of the macro trends that you've heard us call out in the last 12 months to 18 months. And in particular, things like sales cycles, deal size, deployments, approvals, things like that. So, we do see a stabilization. We've certainly seen that stabilization continue into Q1 where we are as we stand now. And the guidance today just assumes that continued stability.

Speaker 5

Yes. And I just want to add to that a little bit. Look, bookings are actually pretty good. Bookings are strong. Given still a bit of instability in macro, upsell for us is a little bit more challenged.

Speaker 5

So when I say bookings, I mean new logos and new business in particular. So we are seeing strong demand there, okay? And that's really one thing would bode well for the future. Issues a bit more with upsell and in certain cases, downsell. And this is just as businesses are rightsizing.

Speaker 5

But hopefully, as the economy recovers, this too will turn into back into a tailwind. But as you can you saw from our press release and releases and some of the prepared remarks, Look, we continue signing up new logos and very important logos. And to make this comment, I went into how well our Enterprise segment is doing. But our SMB segment, which is a 1 $300,000,000 business, is also going pretty strong. So I would say that it's certainly high far from being frothy, but I would say the general my general feeling is that things are healthy out there.

Operator

The next question is from Michael Funk with Bank of America. Please go ahead.

Speaker 7

Yes. Thank you for the question. One for Vlad, if I could. So while improving playbook in a subscription based model with slowing growth is to roll up smaller competitors and gain scale. Sonali mentioned inorganic as a potential use of capital during her earlier remarks.

Speaker 7

So in your view, what is the argument against rolling up smaller competitors to improve scale at RingCentral and potentially grow margin faster and your dominant market share position?

Speaker 5

Yes. Look, so firstly, we are by no means adverse to M and A. It has to make sense. We've highlighted our recent Hopin acquisition and how well it's doing for us. So, I would say that in the Hopin case, it will be more of an adjacency versus a competitor.

Speaker 5

I think that there are different ways to look at this. But by going after adjacencies, you're acquiring or buying into new TAMs and new SAMs. And it would be, we think, deals like that would provide long term tailwinds to the business a whole and would set up well for long term growth. As far as buying up competitors, look, there are many reasons to do it, such as various efficiencies that can be garnered. But then if we're talking about direct competitors, then it's a matter of what do you do about the platforms?

Speaker 5

Do you run multiple platforms? Do you move from one to the other? I think we have some relatively recent examples in the industry where even amongst our folks that one would say would be in our space, where these types of mergers yielded results that were a little bit mixed. So, you just need to be a little bit more careful. But certainly, at the right price, we would never say no.

Speaker 5

And I can tell you that we routinely look at numerous opportunities given our size and stability of our business. And very importantly, our most recent cash flow expansion in free cash and profitability, we do feel that we are a natural acquirer, natural consolidator. So always on the lookout.

Speaker 7

That was very helpful. And certainly, I look forward to hosting you next week in Boston for the NDR. So I look forward to seeing you then.

Speaker 3

Same here. Thank you.

Operator

The next question is Samad Samana with Jefferies. Please go ahead.

Speaker 8

Hi, good evening. Thanks for taking my questions. So it's kind of a multi partner as well. So on the new products, I'm glad it's a big expansion of the portfolio, but may touch up against at least some of what your ISV partners also provide if I think about sales, events. What how should we think about maybe where you fit into the ecosystem versus some of the companies that you partner with?

Speaker 8

And then finally, just what are you assuming for UCaaS versus TCaaS versus other maybe as we think about 2024 ARR growth just because there's been kind of just big differences in the growth rates? Thanks to both of you.

Speaker 5

Yes. Hi, Samad. Yes, look, no, great questions. Look, when you're saying some of the companies we partner with, I assume you're referring to BringCX visavis RingCentral Contact Center, which is hosted by NICE and Contact. So assuming I have the question right, look, they're designed to address different segments of the market and different use cases.

Speaker 5

By and large, NICE and Contact is a well established enterprise leader. They're able to and have proven success in hosting multi 1,000 seat contact centers with very complicated use cases. And they fill a very nice niche in the upper end of the market. So we have this integration with them that's multi year old, and it obviously has been quite successful for us and for them over the years. And we stay committed to that relationship.

Speaker 5

Having said this, we clearly see an opportunity at the bottom end of the market as well as maybe even some of the larger customers, but with simpler, more streamlined workflows. And this is where we saw an opportunity to come in with a differentiated product that's simpler to use, simpler to deploy, a lot more cost effective. We truly are positioning it with disruptive pricing, and people are taking notice. And we are think we mentioned we've doubled the number of logos in about 3 months. So we're happy with that result.

Speaker 5

We already have some larger customers in the thousands of seats. Frankly, that is that was a pleasant surprise for us, but success breeds success. And look, it's very early, but early signs are pretty positive. So for now, we believe that the 2 will coexist.

Speaker 3

So Samad, just to answer your question about UCaaS, CCaaS bookings growth breakdown. So firstly, we don't specifically guide on bookings and certainly not bookings or growth by product. But I can just give you a bit of color there. We do believe and certainly embedded in the guide and the comments I made earlier about we think we do see upside to where we're guiding. We believe we can grow faster than the

Speaker 4

market for each of these

Speaker 3

where UCaaS is sort of mid single, where UCaaS is sort of mid single. We think we could grow significantly above that. And then for CCaaS, I think the market again, it's below 20% in terms of what third party data is saying. And certainly, ring CX will be well above that. But overall, we believe we will grow faster than the market in both of those segments.

Operator

The next question is from Kash Rangan with Goldman Sachs. Please go ahead.

Speaker 9

Yes. Vlad, you talked a lot about new products, etcetera. So what does the new product direction of RingCentral look like for the next few years? Where do you see untapped opportunities for innovation that can get the company back to reaccelerating growth as certainly pointed out. And it's always good to see founders be involved in the business at this stage.

Speaker 9

It's good to have you back. But founders, I'm sure you will agree more than anybody planned are not satisfied with the single digit growth rate. I mean, they're inherently growth people. So how do we put that put your new product strategy in the context of your real aspirations for the company? And what are the things that you could be doing differently the next few years?

Speaker 9

Thank you so much. Right.

Speaker 5

Yes, Hiyush, look, so we are, I would say, at the early stages of executing on exactly the strategy that you've outlined. So we are now and frankly, for what I remember, really maybe for the first time in our existence as a public company, we are now actively talking about NPIs, new product introductions, and about becoming a multi product company. I can tell you that it sounds simple, but sure, you have one product, what's another one to add? It is actually a big deal, okay, to go from a single product where you have a sales force trained to send to sell one particular solution, where you have product people who are specialists in one particular area and only that particular area, where a technology base only needs to address one use case, support, etcetera. So everything now needs to be done several times over, which is a heavy lift.

Speaker 5

But we think that Juice might be worth the squeeze here because it opens up new dams for us, largely expands our cumulative TAM and very importantly provides us with new buyer personas. So your addressable market increases as well in addition to the TAM increasing, okay? So if you look at our just recent introductions, look, we've had we've reintroduced or introduced ringCX just last quarter, okay? And it already has over 100 logos. We have repackaged events, RingCentral events.

Speaker 5

That was also last quarter. And we've announced a very major win. We announced a very major win with Harvard today. That's a big deal. That was a head to head win against a very well known and well funded competitor, let's say.

Speaker 5

Okay? So we think that these are early signs of successes to come. If you think about it, the goalpost that we've set of $100,000,000 in 2 years from these new products, it's meaningful. And I guess you can say, well, gee wiz, RingCentral is a $2,300,000,000 company. What's another $100,000,000 But $100 is a big deal, okay, because it's as of today, if we had that, it would be 4 additional points of growth.

Speaker 5

So that by itself would put us into double digits. And this is Earth. So core belief here is that by redoubling on new products not introductions, I mean, we cannot be introducing a product per quarter. That would be hard to manage. But RingCX gets us squarely into the cloud contact center market and which is large, growing faster than the traditional U.

Speaker 5

K. S. Market. So it will be a growth driver. Events is a completely different buyer persona for us.

Speaker 5

We are now able to sell to marketing departments and sales departments and something that we've never able to do with our traditional products. So we believe that that's going to be a meaningful business. And meanwhile, we see continual stability in our base. We are able to gain substantial new logos, both in SMB and Enterprise, I already covered that. So I think I believe that all of this will be adding up.

Speaker 5

And I'm optimistic that we can, over time, get back into double digit growth even as we cross the $2,500,000,000 mark and beyond that. I mean, it's a heavy lift, but we do have a strong team. And most importantly, we have we are playing in markets which are still grossly underpenetrated. And we are one of the large and profitable companies, one of the few large profitable companies who are playing in this space.

Operator

The next question is from Ryan Koonce with Needham. Please go ahead.

Speaker 10

Thanks for the question. I want to ask about the competitive environment and the shift toward AI features and new products. And how are you seeing that shift impact the decision criteria of your customers? And maybe just want to buy UCaaS or CCaaS, are you seeing that in the forefront? And how is it changing the types of competitors you bump into, whether it's a legacy player or maybe like a Zoom or a Dialpad that's more focused on AI?

Speaker 10

Thanks.

Speaker 5

Yes. Well, look, I'll just speak about ourselves. I won't comment on what Zoom or Dialpad or anyone else certainly is doing. I would maybe question a little bit, think that any of them are more concentrated on AI than we are. We do see ourselves as an AI first company.

Speaker 5

RingCX, in particular, is leveraging our RingSense technology, which is our AI platform, and that is having very good traction out there. Growth is very much, in my mind at least, my understanding is very much tied to specifically it being an AI first product, okay? And look, AI in a way, is a great equalizer. With AI Technologies, we can go against industry incumbents. And we don't need to replicate the entire feature set to be competitive just because the way that people approach, for example, customer service is radically changing with availability of LLMs and no IVAs and just as game shifts from, hey, let's empower or power up more agents versus let's handle more transactions at quality, but save companies money by letting them reduce their contact center staff.

Speaker 5

So we think that for Ring CX in particular, it would be a great tailwind. Same for Events, okay, which is the 2 products we're highlighting. Again, it is absolutely ripe for AI innovation. And we'll have a lot more to say about both of these and some more at Enterprise Connect, which is coming up next year. Now as far as our core product is concerned, look, all is said and done, why do people buy RingCentral given the other options in the market?

Speaker 5

And the answer is to me at least is relatively straightforward. So, the bias, A, because we're stable, we're always up, we have 5 to 6 9ths availability for many years and counting. And from what we are being told, this is absolutely industry best, okay? So this is one reason. 2nd reason is we are global and regulatory compliant across the world.

Speaker 5

Whatever we are allowed to do business and there are still some countries that are closed unfortunately, for example, China. So, okay, we're not going to be a regulatory compliant and we're not offering services there either. But everywhere else, we've checked all the boxes. So companies large and small can be can feel safe from that perspective who are using us or reselling us, okay? Then there is the feature set, okay?

Speaker 5

And we've said we've pioneered the space. We've been added for the longest. We simply have more features and more integrations than anyone else out there and that includes even some of the larger competitors that you can easily think of, okay? And very importantly, it's our commitment to data privacy. We are religious about our customers' data just as we are about our data.

Speaker 5

And that is a commitment coming in from the highest levels. And it's just something that our customers don't tend to be concerned about is data privacy or our commitment to security. So this is why people buy Now what does it have to do with AI? If you take all of that and overlay AI on it, then you simply get a more powerful solution, okay? People, given our size and our statutes in the field, people don't need to buy RingCentral for AI alone, okay?

Speaker 5

But if you combine this industry leading, stable, global, secure platform with state of the art AI capabilities, then we think you have something that's quite differentiated and that will truly take us into this decade and beyond. I don't know when the next magnitude of innovation will happen that could compare with what we're now experiencing with AI. We're super early there. And opportunity to innovate and to differentiate are literally boundless, okay? So again, we'd really urge all of you to please visit us at Enterprise Connect.

Speaker 5

We'll have more to share then. And obviously, results will speak for themselves. But you can expect that even as we are very much moving towards a better balance between growth and profitability than perhaps what we've had in the years past. Our commitment to innovation is unwavering. We have well over 1,000 engineers involved with the company.

Speaker 5

It is not an area that we're saving on or skimping on. So expect more goodness in that area.

Operator

And the final question today is from Brian Peterson with Raymond James. Please go ahead.

Speaker 7

Thanks. And nice job on the free cash flow ramp this quarter. Certainly, I appreciate all the color on the demand environment, but would love to hear about what's going on at the top of the funnel. How has that trended? Any notable changes in mix there via partner versus direct or enterprise new products?

Speaker 7

Would love to get any perspective there? Thanks, guys.

Speaker 3

Yes, sure. Thanks for the kind words on free cash flow. So in terms of what we're seeing in the demand environment, I would say there's not a really big change to call out. One thing that I would just comment on is we did see stabilization in FMB. We saw strong trends from the enterprise side of the house.

Speaker 3

And we don't really tend to give you much more breakdown in terms of segments or what we're seeing from the segments. But in terms of how the guidance is reflecting what we're seeing, it's assuming this continued stabilization, so no real improvement. So if we were to see an improvement, for example, in the upsell environment or if we were to see traction from some of the steps we're taking around churn to improve net retention, then that would be upside in terms of what we've laid out to you today. The other thing I just want to say before we conclude the call, Vlad and I and the senior management team are extremely focused on SBC. And hopefully, you saw that in the way that I guided, there's meaningful, meaningful reductions in 2024.

Speaker 3

So we're guiding to 16% coming down from 20%. But we're not going to stop there. Net new grants for 2024 will be down by approximately 50%, but we will continue on our drive to bring that down. And you should expect further several 100 basis point improvement as you look forward to 2025. This is something that we take very seriously.

Speaker 3

And thanks for calling out the free cash flow and mentioning the free cash flow, but we care about free cash flow per share. And hopefully, you will have noted that the free cash flow per share growth that we will deliver for you in 2024 is 25% year over year growth. So, look forward to spending more time with all of you in the conferences coming up over the several weeks. But just wanted to be sure that that point was taken home.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Travelers Companies Q4 2023
00:00 / 00:00
Remove Ads