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RingCentral (NYSE: RNG)
Q3 2024 Earnings Call
Nov 07, 2024, 5:00 p.m. ET
RingCentral Shows Strong Performance in Q3 2024 with New Leadership
Conference Call Overview
Operator
Hello, and welcome to the RingCentral third-quarter 2024 earnings conference call. [Operator instructions] This call is being recorded. I would now like to hand the call to Will Wong, Vice President of Investor Relations. Please go ahead.
Investor Relations Presentation
Will Wong — Vice President, Investor Relations
Thank you. Good afternoon, and welcome to RingCentral’s third-quarter 2024 earnings conference call. Joining me today are Vlad Shmunis, founder, chairman, and CEO; and Vaibhav Agarwal, senior vice president of FP&A and chief accounting officer. Today’s format will include remarks from Vlad and Vaibhav, followed by a Q&A session.
We have a slide presentation available on our investor relations website that will accompany our discussion today. Please note that some of our comments may include forward-looking statements about the company’s future performance. These statements involve risks and uncertainties that are not guarantees of performance; actual results could differ significantly. We do not commit to updating these statements after the call.
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For risks and uncertainties regarding our business, please refer to our filings with the Securities and Exchange Commission, as well as today’s earnings release. Unless stated otherwise, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided in our earnings release and slide deck. Guidance reconciliations for non-GAAP financial guidance to corresponding GAAP measures are not available as detailed in the slide deck on our investor relations website.
With that, I’ll turn the call over to Vlad.
Leadership Update
Vladimir G. Shmunis — Founder, Chairman, and Chief Executive Officer
Good afternoon, everyone, and welcome. I am pleased to share our third-quarter results and key highlights. I want to extend a warm welcome to Abhey Lamba, our new Chief Financial Officer. He brings over 30 years of experience and most recently served as VP of finance at Amazon Web Services. His expertise in driving growth for large companies will be invaluable for us.
Abhey will officially start in the coming weeks. I also want to thank Vaibhav Agarwal, our SVP of FP&A and chief accounting officer, for his exceptional contributions during this transition, ensuring smooth operations.
Financial Performance
Our third-quarter performance was solid. Revenue exceeded our guidance due to strong growth in our core Unified Communications as a Service (UCaaS) market and robust demand for our new products, especially RingCX. We achieved GAAP operating profitability, and our free cash flow per share increased by 56% year-over-year, driven by our growth and reduced share-based compensation costs.
Our strategic priorities include consolidating our UCaaS leadership, expanding our total addressable market (TAM) with AI-powered products, and growing our partner network while reaching into new markets. We believe this strategy will facilitate ongoing profitable growth.
Strategic Initiatives
To strengthen our UCaaS leadership, we have built a highly reliable business communications platform, known for its robustness and ease of deployment. Our dedication to quality has earned us the title of leader in Gartner’s 2024 Magic Quadrant for UCaaS for the tenth consecutive year. Voice services remain essential, evident by our steady user base, which reflects historical trends.
Moreover, a recent IDC survey noted that “78% of organizations” recognize the importance of voice in their operations. Our commitment to delivering exceptional reliability differentiates us in the competitive landscape.
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RingCentral Expands Voice Communication Services Amid Growing Demand
Companies continue to prioritize voice calling for employee and customer interactions. As a leader in voice communication, RingCentral’s business phone platform is being chosen by enterprises to enhance their use of Microsoft Teams messaging and video functionalities. Teams customers are now turning to RingCentral for advanced phone capabilities not integrated with Teams, such as SMS, fax, call monitoring, call queue management, IVR, rich communications APIs, broad global reach, seamless CRM integrations, and comprehensive analytics and reporting. Leveraging these advantages, RingCentral secured a noteworthy $1 million-plus TCV win with a large European healthcare provider, already a Teams customer.
This healthcare provider plans to implement RingCentral’s solutions across more than 35 offices in Europe. Currently, voice remains the primary method of business communication, and artificial intelligence (AI) is increasingly enhancing this sector. Businesses are now tapping into the valuable insights and data from their voice conversations. To support this trend, RingCentral introduced the RingCentral AI Assistant, now included at no extra charge for all RingEX customers.
This AI Assistant creates detailed real-time notes for voice calls, assists with text writing and translation, and summarizes meetings, enabling team members to focus on critical tasks instead of administrative details. Omdia Research has noted the accuracy of RingCentral’s AI Assistant. One of its long-term clients, the Detroit Pistons, is currently implementing AI-powered note-taking for essential meetings and strategy sessions. Paul Raiper, their VP of IT, spoke of its impact, stating, “It has been a game changer for business operations.”
Previously, they were concerned about overlooking vital details amidst rapid pregame preparations. This advancement has significantly improved their organizational efficiency. The technology not only enhances administrative tasks but also provides a competitive edge by ensuring that no crucial insights or strategies are missed. In a related advancement, RingCentral achieved a major milestone by obtaining a pan-India license from the Indian Department of Telecommunications.
This license allows the company to operate in all 22 telecommunication circles in India, making RingCentral the first cloud provider to offer fully compliant UCaaS and CCaaS solutions nationwide. Multinational organizations can now easily connect their global offices with their branches in India, thus improving communication and collaboration. Next, let’s discuss our new products. RingCX, our newly introduced CCaaS product, is drawing attention in the market.
According to IDC, over 80% of companies find it essential for their UCaaS solutions to include CCaaS capabilities. The benefits of an integrated UCaaS and CCaaS solution involve enhanced collaboration between call center agents and other departments, which ultimately improves the overall customer experience. RingCX offers a modern AI-driven omnichannel platform, complete with conversation intelligence and quality management services across various digital channels, in addition to voice and SMS. It integrates smoothly with the RingEX platform, standing out for its combination of usability, comprehensive features, reliability, and security. In line with these trends, RingCentral secured another $1 million-plus TCV deal with one of North America’s largest automotive replacement tire manufacturers to implement RingEX, RingCX, and RingSense throughout their operations.
As an additional testament to RingCX’s scalability and capabilities, the entire RingCentral customer service team of over 1,000 support agents recently transitioned to RingCX efficiently and without interruption. Now with over 500 customers up 45% from last quarter, RingCX demonstrates robust demand and growth potential.
Alongside the increase in customer base, the average revenue per user (ARPU) has also seen substantial growth. The AI quality management add-on has significantly contributed, boasting a nearly 50% attachment rate for new bookings this quarter. AUTOPAY, a specialist in auto loans, stated, “Since migrating to RingCX, we estimate a 20% time savings for customer success representatives due to the advanced AI technology it delivers.” To further reinforce RingCX’s value in the mid-market and enterprise sectors, we recently announced a strategic partnership with Verint.
This partnership enables RingCX customers to utilize Verint’s leading workforce engagement management and customer experience automation solutions, complementing RingCentral’s AI capabilities. Together, we aim to boost employee productivity and customer experience, ultimately enhancing operational efficiency for our clients. Focusing on RingCX will allow us to address a broad range of use cases effectively. The strong market traction RingCX is experiencing affirms its value proposition.
As RingCX continues to expand, it holds the potential to capture a significant area of the multi-billion dollar CCaaS market with advantages for RingCentral. Additionally, RingSense, our conversation intelligence platform formerly known as RingSense for Sales, now services over 1,200 clients, marking an increase of over 45% from the previous quarter. The use cases and customer spectrum for RingSense are diverse, with legal firms simplifying case management, and healthcare organizations like REE Medical automatically reviewing approximately 75,000 calls monthly compared to only a few hundred manually in the past.
Furthermore, our virtual and hybrid event solution, RingCentral Events, added over 100 new clients this quarter, including Trimble, a Fortune 500 technology firm, which recognized RingCentral Events for its ability to generate high-quality, branded events. We also renewed contracts with key clients such as Block, DHL, eBay, NYU, Rogers, and TELUS. Earlier this year in February, we set a goal to achieve at least $100 million in exit ARR from new products by the end of 2025. The promising results so far indicate we are on track to meet this ambitious target.
Now, on to partnerships. Our unique approach includes a substantial direct sales force, engagement with top global service providers (GSPs), and a large network of partners and resellers. This strategy grants us access to various customer segments and markets, strengthening our competitive advantage as we scale our multi-product business.
Highlights from the quarter include further growth in our GSP segment, which is outpacing our overall business growth. Our long-term partnerships with GSPs and the strong integration we’ve achieved with them in product development and marketing set us apart from other UC and CC providers.
An excellent example of this is our decade-long partnership with AT&T, a leader in fiber, fixed wireless, and wireless services in the U.S., which we recently renewed. Our GSP network continues to drive international growth as well, with new collaborations like Optus, a leading Australian service provider, and early success with Vodafone, British Telecom, and TELUS expanding our global reach.
By leveraging our distinctive GSP network, we are enhancing RingCX’s growth potential. Vodafone, Cox, and Zayo have all selected RingCX as their CCaaS solution.
RingCentral Reports Strong Third-Quarter Results with Promising Growth Ahead
In a solid performance this quarter, RingCentral highlighted its strategic achievements, focusing on partnerships and expanding its offerings to a diverse customer base. The company is optimistic about making quick progress with key partners and is confident about the path forward.
Rewarding Financial Performance
Vaibhav Agarwal, Senior Vice President of FP&A and Chief Accounting Officer, provided insights into the company’s strong financial metrics for the third quarter of 2024. Subscription revenue reached $583 million, marking a 10% increase compared to last year and surpassing the high end of expectations. Annual Recurring Revenue (ARR) also saw a jump to $2.48 billion, up 9%, benefiting from positive currency impacts and a growing enterprise customer base.
New products, such as RingCX, contributed notably to this success, demonstrating consistent growth comparable to previous quarters. Subscription gross margins stood at 81%, slightly down due to investments in infrastructure for new product growth. Overall, the Average Revenue Per User (ARPU) remained steady at over $30, with new product ARPU contributing positively to the overall trend.
Profitability Takes Center Stage
Operating margins increased to 21%, reflecting a disciplined spending approach. Notably, sales and marketing expenses decreased as a percentage of total revenue, allowing for optimization towards higher-margin sales channels. Free cash flow surged by 51% year over year, reaching $105 million, thanks to improved operational efficiency and effective management of working capital.
The company significantly reduced stock-based compensation expenses, bringing them down to $85 million, or 14% of total revenue, a sharp decline from previous years. This reduction reflects the commitment to lowering share grants while enhancing cash flows.
Capital Management Strategy
RingCentral remains committed to a balanced approach in returning capital to shareholders, including debt repayment and share repurchase. The net debt to adjusted EBITDA ratio improved to 2.3 times, down from three times last year, showcasing the enhanced profitability of the firm. The company is set to address its 2025 convertible notes with available cash and expects to reduce gross debt from $1.5 billion to a maximum of $1 billion by the end of 2026.
In Q3, the company repurchased 2.6 million shares for $83 million, and to date, has bought back 7.5 million shares for $245 million, signaling a continued focus on share count reduction to enhance shareholder value.
Looking Ahead
Moving forward, RingCentral anticipates stable macroeconomic conditions, expecting subscription revenue growth of 7% to 8% for Q4. The firm is raising its full-year guidance for subscription revenue up to $2.297 billion, representing a 9% growth. Operating margins are projected to consistently hover around 21%, with a revised expectation for non-GAAP EPS rising to $3.69. Free cash flow is also expected to increase to between $400 million and $405 million, reflecting the company’s disciplined financial management and focus on strategic growth initiatives.
RingCentral’s commitment to delivering innovative products and enhancing profitability positions it well for future success, with a strong foundation built on its recent performance.
RingCentral’s RingCX: A Promising Step Towards the Future of Communication Solutions
In the latest quarterly call, RingCentral’s leadership shared insights on the company’s progress and future plans regarding its unique UC+CC solution. CEO Vladimir G. Shmunis emphasized the early potential of RingCX, their proprietary technology, which aims to better address the evolving needs of customers.
Innovative Moves and Future Expectations
Shmunis highlighted that RingCX is still in its early stages; however, the company anticipates that its bookings will soon match or surpass the peak level of RingCentral Contact Center’s bookings. This development aligns with RingCentral’s broader strategy to enhance growth, expand its market reach through innovative products, and maintain a robust financial profile. By reducing reliance on outside resources for core competencies, the company aims to generate consistent free cash flow and minimize its share count.
Q&A Session Insights
Operator
[Instructions from the operator]
Kash Rangan — Analyst
Thank you, Vlad. The appointment of Abhey as CFO speaks volumes about the team’s direction. I’d like to hear about your approach to AI and its influence on your product strategy, particularly concerning RingCX and others. What insights have emerged from your AI product rollout, and when do you expect to see significant growth from these initiatives?
Vladimir G. Shmunis — Founder, Chairman, and Chief Executive Officer
Thanks, Kash. Indeed, Abhey’s leadership is expected to be impactful. Regarding AI, it’s imperative to recognize its transformative potential. We’re witnessing tangible demand and usage that grows daily. Although it’s premature to share specific numbers, our momentum indicates positive developments. We have already begun monetizing several AI-driven solutions like RingSense and RingCentral Agent Assist.
We anticipate that AI will not only enhance the experience but also solidify average revenue per user (ARPU). While AI may alter the landscape of contact center staffing, it will augment rather than replace human communication efforts. Our new AI capabilities, particularly our partnership with Verint, promise comprehensive coverage for businesses of all sizes.
Expanding Market Presence
Siti Panigrahi — Analyst
Thank you, and welcome to Abhey. With the focus on CCaaS, how do you foresee RingCX competing against established players like NICE, especially within the SMB and enterprise sectors?
Vladimir G. Shmunis — Founder, Chairman, and Chief Executive Officer
Great question, and thank you for acknowledging Abhey. RingCX was initially designed with SMBs in mind, but we’ve observed significant traction in the enterprise segment as well. Our own transition, migrating a large portion of our contact center operations to RingCX, demonstrates its capabilities. We are managing a complex internal system, demonstrating that RingCX can effectively support large enterprises.
In terms of market positioning, RingCX is poised to integrate advanced unified communications with top-notch contact center solutions, gathering the best practices learned from our history with cloud PBX and inContact. We’re confident that this approach will help us capture a versatile client base. With time, RingCX will solidify its reputation as a powerful solution in an increasingly competitive market.
We look forward to what the future holds as we continue to innovate and adapt to meet customer needs.
RingCentral Optimistic About Future Growth with AI-Driven Contact Center Solutions
As RingCentral continues to develop its new AI-first product, RingCX, the company is optimistic about its prospects in the competitive Contact Center as a Service (CCaaS) market. The firm aims to capture a larger share of the market with a user experience firmly under its control, supported by effective pricing and package structures.
The Path Forward with RingCX
While RingCentral Contact Center, known as RingCC, remains available and may benefit from an extended partnership with inContact, the focus is now on RingCX. This new offering is designed to transform the CCaaS landscape with its innovative technology. Partnering with Verint strengthens RingCentral’s position to cater to a broad range of customer needs, from small businesses to large enterprises.
Gross Margin Insights
Siti Panigrahi, an analyst, inquired about recent declines in gross margin. Vaibhav Agarwal, Senior Vice President of FP&A and Chief Accounting Officer, responded that the gross margin remains strong at around 81%. He highlighted that stable Average Revenue Per User (ARPU) and scaling benefits are contributing to this stability, despite some temporary challenges tied to new product launches.
Revenue Forecasting for 2025
Eamon Coughlin, another analyst, asked whether the growth rate in the fourth quarter could be used as a benchmark for overall revenue in 2025. Vladimir G. Shmunis, Founder and CEO, stated that while good progress is being made, they are currently focused on achieving strong results in Q4. They also have yet to finalize planning for 2025, especially with the arrival of a new CFO approaching.
He noted that there are encouraging signs in their business, including robust utilization of voice services, which is vital for their growth. Customer demand remains strong, particularly in the unified communications (UC) space, contributing to their optimistic outlook on RingCX’s performance.
Navigating Channel Partnerships
As the team moves away from the combined UCaaS and CCaaS approach with NICE inContact, Shmunis pointed out that some friction may arise during this transition. Despite this, he emphasized that they expect RingCX to gain traction and eventually reach the previous heights of RingCC’s performance. Given its broader focus on both small and large customers, the changes will take some time to materialize.
Performance of Microsoft Teams Alignment
Responding to a query regarding Microsoft Teams, Shmunis highlighted that many enterprise clients are inclined to use RingCentral along with Teams. The growth rate in their enterprise segment continues to surpass overall company growth, maintaining double-digit growth rates, a rarity in the current market landscape.
While the integration of RingCX with Teams wasn’t seen as a significant influence yet, it is expected to evolve in importance over time, particularly as they introduce RingCX specially designed for the Teams platform.
ARPU Expansion Drivers
As the conversation shifted to Average Revenue Per User (ARPU) growth, Shmunis acknowledged that cross-selling newer products contributes significantly to this metric, alongside base price improvements. Continued focus on enhancing their product offerings could also support more efficient sales and marketing strategies moving forward.
RingCentral’s Latest Strategies Boosting ARPU and Revenue Growth
Innovative Products Drive Strong Performance
RingCentral is focusing on cross-selling and upselling new products to enhance annual revenue per user (ARPU). One significant product making waves is RingCX, which has contributed to an overall ARPU increase, currently sitting around $30. This figure has remained steady, even amidst competitive pricing pressures.
AI Initiatives Expanding Horizons
The company is shifting its strategy towards AI-based products, specifically RingSense, which aims at broader applications beyond just sales. These AI tools offer benefits like quality management and agent assistance, ultimately increasing revenue opportunities. As competition heats up, RingCentral is confident that its value offering remains unmatched in the industry.
Focus on Cost Efficiency and Sales Effectiveness
On the financial side, the percentage of revenue spent on sales and marketing has dropped below 40%, a decrease from 45% in 2022. This positive trend signals improved customer acquisition costs (CAC) as the company adopts more economically favorable routes to market.
Enterprise Growth Steady Amidst Market Variability
Discussing market dynamics, the third quarter showcased double-digit growth in enterprise annual recurring revenue (ARR). Major clients have committed to longer contracts, indicating confidence in RingCentral’s offerings. However, trends remain mixed, with small and medium-sized businesses (SMB) showing some stabilization against ongoing macroeconomic challenges.
Partnerships Enhancing Revenue Streams
RingCentral’s collaboration with AWS is described as healthy and beneficial. Although specific revenue numbers are not disclosed, the synergies between their technologies promise potential growth. Working closely with AWS, RingCentral expects its solutions to gain increased appeal among their substantial customer base.
Key Insights from Leadership
Leadership from RingCentral continues to emphasize the importance of delivering exceptional value at competitive pricing. They aim to retain a loyal user base and encourage revenue growth through innovative solutions while navigating market dynamics effectively.
Disclaimer
This article is derived from a conference call transcript produced for The Motley Fool. While we strive for accuracy, there may still be errors or omissions. As a reader, we recommend conducting your own research, including reviewing the company’s SEC filings. For more details, please consult our Terms and Conditions.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
