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RingCentral (NYSE: RNG)
Q1 2024 Earnings Call
May 07, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the RingCentral first quarter 2024earnings conference call As a reminder, all participants are in a listen only mode, And the conference is being recorded.

[Operator instructions] I would now like to turn the conference over to Will Wong, vice president, investor relations. Please go ahead.

Will Wong — Vice President, Investor Relations

Good afternoon, and welcome to RingCentral’s first quarter 2024earnings 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 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. They 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.

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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. 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 now available as discussed in detail in the slide I posted on our Investor Relations website.

With that, I’ll turn the call over to Vlad.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Good afternoon, and welcome to our first quarter conference call. We had a solid start to the year. In Q1, Total revenue rose 9% to $584 million, above the high end of our outlook. ARR rose 10% to $2.4 billion, with enterprise up 13% for the fourth consecutive quarter.

Consistent with our strategy of driving profitable growth, we delivered a record quarter of profitability with operating margin rising to approximately 21%, which was well above our outlook for Q1. I am also proud of the material progress we have made on reducing stock-based compensation as we have delivered another quarter of year-over-year improvement in SBC as a percent of revenue. Our execution in driving profitable growth has already resulted in an approximately four times year-over-year increase in non-GAAP operating profit less SBC. Improvements in SBC, combined with our share repurchase program, is expected to result in our full-year fully diluted share count declining year over year for the first time in our history.

Speaking of making history. I’m excited to share that in Q1, we signed our largest UCaaS seat deal ever. We won a competitive RFP and sold 40,000 seats to a Fortune 500 retailer with over $20 billion in revenue. With RingCentral, this customer will be able to address their main pain points, which include dropped call, long hold times, inadequate call reporting and lack of advanced voice features.

In this megadeal win, RingCentral will be replacing their legacy solution, Skype for Business, demonstrating our ability to win against Teams Phone while operating within the Team’s ecosystem. In fact, the majority of our enterprise customers have Teams. And in Q1, more than half of our large $1 million TCV deals were to customers that are utilizing our solutions integrated with and alongside Microsoft Teams. Importantly, this win was in one of our gold verticals, which include healthcare, financial and professional services, retail and public sector.

We are mission-critical in this vertical and we win given our unmatched reliability, ability to solve complex use cases, our integrated UCaaS and CCaaS platforms and our thousands of available integrations. This vertical has been a key growth driver, especially in enterprise. And we believe that there are at least 100 million seats in this vertical that we can convert over time. Let me now give you more color on why we win, which is centered around our guiding principles of trust, innovation and partnerships or TIP as we call it.

First, trust. We achieved five NICE uptime for the 23rd straight quarter. In fact, over the past year, we’ve reached a new milestone of six NICE. Our cloud platform is carrier-grade, secure, standard compliance and battle-tested and continues to be a wide competitive moat and the key differentiator.

Another core strength is our ability to solve complex use cases and integrate into customers’ commonly used horizontal and vertical-specific applications, especially in our gold verticals. We offer these customers a large breadth of business communications API, as well as industry-specific integration, workflows and certification. For example, within the healthcare vertical, we integrate into patient data management applications such as EPIC and Cerner, as well as meet, HITRUST and HIPAA compliance requirements. These customers can create workflows based on their specific needs of their businesses.

For example, healthcare providers can use RingCentral’s API to send prescriptions directly to the pharmacy system electronically and automatically trigger appointment reminders via SMS. Additionally, our market-leading UCaaS solution integrated with the CCaaS platform supports a wide variety of use cases and is also a vital differentiator. With RingCentral, companies have the ability to streamline workflows with our advanced tools and integration. This was the key factor in why Sanitas, a Fortune 500 operator of medical centers in the U.S.

selected RingCentral this quarter to power its communications platform. With RingCentral, Sanitas will be able to provide their customers with the unified, seamless experience across interactions such as scheduling, billing and general inquiries. We believe this should drive increased revenue and patient retention from improved customer experiences, as well as lower cost from the increase in employee efficiencies that our industry-leading integrated UCaaS and CCaaS platform provides. These are just two examples of our robust progress in new customer acquisition activity in Q1.

But equally as important is our ability to retain existing customers and maximize customer lifetime value. On this point, our renewed focus on customer care is resulting in improved gross retention and better NPS scores. The combination of better gross retention, improving macro trends and the introduction of our new products should drive higher net retention going forward. Now on to innovation.

This past quarter, we announced a name change of our flagship industry-leading UCaaS solution from MVP to RingEX, which stands for RingCentral Employee Experience. With this change, we are signaling our commitment to continuous innovation based on emerging generative AI technologies. We started off on a high note with RingEX with RingSense AI as we won the overall best of Enterprise Connect Award in March. One key reason we won is because of our differentiated industry-first, real-time AI for voice interaction.

With this feature, users are able to capture key decisions and track action items in real time, enabling on the spot referencing and heightened accuracy. It is early days, but users are already seeing significant time savings. For example, one customer highlighted that for an average 20-minute call, real-time notes saved them five minutes post call, while also keeping all their notes attached to the context to allow for easy referencing in future interactions. Voice-driven data historically has been largely inaccessible at scale as the data has been siloed.

With RingSense AI now being an integral part of RingEX, we empower customers to take advantage of the billions of minutes of conversations that take place on our platform. Our customers will now be able to automate manual tasks, unlock deeper insights and create more streamlined employee and customer workflows. Continuing on the theme of innovation, let me now share progress on our new products. First, RingCX, our AI-powered contact center, which is simple to use and easy to deploy and which provides agents with all-in-one capabilities across 20-plus digital channels, automatic screen pops, contact matching the CRM, case and ticket creation and interaction logging for all voice and digital interactions, all from an intuitive user interface.

We now have over 200 RingCX customers, almost double versus fourth quarter 2023. RingCX is now available in six countries: the U.S., Canada, the U.K., France, Germany and most recently, Australia. In fact, one of our newest RingCX customer is from outside the U.S. Rotherham Metropolitan Borough Council in the United Kingdom, they purchased over 200 RingCX seats and over 3,000 RingEX licenses in Q1.

Two key factors for our win. One, our unmatched reliability as their prior cloud provider had consistent outages; and two, our fully integrated RingEX and RingCX solution. They will be using RingCX to provide a range of services for their almost 300,000 residents, including addressing income and social care planning, housing and business regulation and enforcement questions. We are rapidly innovating with RingCX.

We added over 300 features in Q1, bringing the total to over 1,000. Among the new features of RingCX are native integration into Salesforce, HubSpot, ServiceNow, Zendesk and Microsoft Dynamics. We have also opened the RingCX platform to enable a growing ecosystem of partners such as Google, Dialogflow, Cognigy, Yellow.ai, Balto and Calabrio. Our strength in voice, ease of deployment, use and maintenance and our attractive pricing and packaging give us confidence that we will continue to see positive results from RingCX going forward.

We also continue to see good traction with RingSense for Sales, our first product in the RingSense portfolio. We have more than doubled our customer count sequentially in Q1 to over 600. Many customers are benefiting from the automated interaction summaries, follow-up notifications, call scoring, sentiment analysis and performance management. This frees up sales people’s time, allowing them to focus on selling versus performing administrative tasks.

For example, an insurance agency in the Midwest is using the AI-driven insight for RingSense for Sales to gain visibility into what’s working and not working in the agency’s sales and client services practices. RingSense is able to monitor and glean insights from all their voice data, tone, word choice, energy sentiment, helping the customer identify valuable insights they would not have caught by listening to a random selection of agent conversations. And within our own sales organization, we are seeing RingSense for Sales, deliver both productivity and efficiency gains. Our employees are now able to save at least two hours a week or about one full workday a month from using RingSense’s automated note summary features.

That is one extra day to speak with customers and potentially win more deals. Lastly, events, which provides us with the opportunity to expand into new personas outside of our typical base, including line of business decision-makers. RingCentral Events saw a roughly 25% sequential increase in new logos in the first quarter. New AI features for Events such as AI-writer and Q&A categorization further enhance the value that customers receive.

These features also continue to differentiate RingCentral from the competition and were important contributors to customers such as the Detroit Pistons, Vanderbilt University, a Fortune 50 technology company and one of the largest media companies in the world, selecting RingCentral Events during the first quarter. Last but not least, partnerships, which are a key to continue to scale our multiproduct business. We have a diverse network of partners, which includes over 15,000 channel partners, a number of large strategic OEM partners, AWS and some of the largest global service providers, which include AT&T, BT, Charter Communications, Deutsche Telekom, Telus and Vodafone. We also continue to expand this network and announced our new partnership with Optus, Australia’s second largest provider of telecommunication services during the first quarter.

GSPs are a key growth driver for RingCentral and are growing above our overall growth rate. We saw good traction with this cohort in Q1, including with Vodafone, where we won a 1,000 seat-plus deal with a large European retailer. Regarding Avaya, they continue to be the world’s largest holder of on-prem UC and CC seats. RingCentral continues to be Avaya’s exclusive UCaaS provider.

And in Q1, we extended the term of our multiyear agreement and enhanced our GTM and innovation collaboration model. We expect to work even more closely with Avaya to position, market and sell Avaya Cloud Office by RingCentral to the millions of existing Avaya on-prem users. Stay tuned for additional joint product announcements at the upcoming Avaya ENGAGE conference next week. We believe that as a whole, our broad partner network will be an important contributor to our continued profitable growth.

In closing, Q1 was solid. We are executing on all our strategic priorities. Our core growth is stabilizing, our new products are demonstrating traction, our SBC is improving, and our free cash flow is expanding, demonstrating the strength of our business and its inherent profitability. I’m very excited about our future.

With that, let me turn the call over to Sonalee.

Sonalee Parekh — Chief Financial Officer

Thanks, Vlad. I’ll provide highlights from the first quarter and then discuss our business outlook for the second quarter and full year. In Q1, subscription revenue of $557 million was up 10% year over year, above the high end of our guidance range. ARR of $2.37 billion was up 10% versus last year.

On a year-over-year basis, currency was neutral while on a sequential basis, currency represented an almost $10 million headwind. Enterprise ARR continues to perform well and rose 13% versus last year, to $1.02 billion. We saw good traction with large customers, winning many $1 million-plus TCV deals in our gold verticals. As Vlad highlighted, this includes a new Fortune 500 retailer that has committed to spending more than eight figures with us over the next few years.

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.

Our new product ARPUs are solidly higher than current overall ARPUs. Over time, we expect new products to become increasingly accretive to overall ARPU and retention. Operating margin rose 350 basis points versus last year to 20.7%, solidly above our guidance of 19.5%. The outperformance was driven by upside to our revenue guidance, as well as the timing of certain operating expenses.

Importantly, we continue to remain disciplined in our spending in particular, within sales and marketing. Moving to free cash flow. We are now reporting and will guide to free cash flow, defined as net cash provided by operating activities less capitalized expenditures. This more closely reflects the cash flow generation of our business in a given period and includes cash paid for interest and other nonrecurring items, such as restructuring, which we will call out separately.

In the first quarter of 2024, we generated free cash flow of $77 million. This is net of cash paid for interest of $23 million and nonrecurring payments of $15 million, as well as $10 million of cash received from certain strategic partners. Excluding the impact of interest and these nonrecurring items, free cash flow would have been $105 million, compared to $61 million in the first quarter of 2023, representing over 70% growth. Moving to stock-based compensation.

As a percent of total revenue, stock-based compensation fell to 15.6%, down 340 basis points versus last year. We also remain disciplined on stock grants to both new and existing employees and continue to expect new grants, net of forfeitures, in 2024 to be about half of 2023 levels. Moving to our balance sheet. During the quarter, we repurchased 2.4 million shares for $80 million under the plan previously authorized by our board of directors.

Recently, our board increased our repurchase authorization by an incremental $250 million. We currently have approximately $375 million remaining on our total authorization. Given our current valuation, strong and growing free cash flow, and the significant progress we have made to bring down our leverage, we believe that share repurchase provides an attractive relative return. Moving to our convert.

We had 161 million of our 2025 convertible notes outstanding on March 31. There is no change in our plan shared last quarter to utilize our existing liquidity sources and a portion of our free cash flow to retire the 2025 convert prior to its maturity date in March 2025. Our net leverage ratio which declined year over year by over one turn to 2.5 times at the end of Q1 2024, continues to trend downward as we expand our adjusted EBITDA and reduce gross debt. Our low and improving leverage ratio, strong BB credit rating, significant liquidity and strong free cash flow growth gives us flexibility and a range of alternatives for addressing our 2026 convertible notes.

Now let me turn to guidance. Embedded in our guidance is the expectation that the macro environment and current business trends remain relatively stable with no further material improvement or deterioration in conditions. With that backdrop, for the second quarter of 2024, we expect subscription revenue growth of 9%; total revenue growth of 8% to 9%, non-GAAP operating margin of 20.7%, flat versus the first quarter of 2024 and non-GAAP EPS of $0.87 to $0.88. For the full year, we are raising our revenue outlook to reflect our Q1 revenue outperformance.

We now expect subscription revenue of $2.267 billion to $2.287 billion, representing growth of 8% to 9% and total revenue of $2.379 billion to $2.399 billion, representing annual growth of 8% to 9%. We continue to expect non-GAAP operating margin of 21% and stock-based compensation as a percentage of total revenue of approximately 16%. We are raising our non-GAAP EPS to $3.59 to $3.67, up from $3.50 to $3.58, as we now expect 96 million to 97 million only diluted shares outstanding in 2024, down from 98 million to 99 million shares previously. Regarding free cash flow, under our updated definition, we expect free cash flow of $385 million to $390 million.

Our outlook for $385 million to $390 million includes cash paid for interest of $60 million and cash paid for nonrecurring restructuring and other items of $20 million, as well as $25 million of cash received from certain strategic partners. Excluding interest in these nonrecurring items, we are raising our free cash flow outlook from $415 million to $420 million to $440 million to $445 million, up $25 million from our prior outlook. Our updated free cash flow guidance reflects the benefit we are seeing from better cash collections and lower commissions. We are also benefiting from a shift to annual upfront billings for some contact center customers.

In summary, we had a strong start to the year and are raising our revenue and free cash flow outlook. Our leading differentiated products and unique go-to-market combined with our scale and laser focus on driving profitability and free cash flow position us well for creating long-term shareholder value. With that, let’s open up the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] First question comes from Kash Rangan of Bank of America. Please go ahead.

Kash Rangan — Bank of America Merrill Lynch — Analyst

Hi. Thank you very much. With Goldman Sachs. Vlad, question for you.

It looks like enterprise ARR is growing faster than the overall company. It looks like that’s an area of relative strength for the company as evidenced by the 40,000 UCaaS deals that you signed. Can you tell us what is driving the strength in the enterprise, be it product or competitiveness or execution standpoint? One, if I could slip in, certainly, you raised free cash flow guidance by a pretty meaningful amount. Can you tell us — congratulations.

Then can you tell us how sustainable is the free cash flow growth rate of the company going forward? Thank you so much.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Great. Hi. Thank you. OK.

To the first question, look, we have a good product. It continues to be an industry-leading product. We continue innovating. As we mentioned, we have just and for the first time ever, won best of the show overall award at Enterprise Connect.

That’s a big deal, and we won specifically on the strength of our differentiated AI offering. With respect to both enterprise as a whole, but this one particular for instance — this deal in particular, look, what are we known for? We’re known for reliability, we’re known for — and this is bulletproof, knock on wood. It’s multiple, multiple years of Five9 availability. And now, I think with about a year and a half of Six 9s.

That has not been matched, I don’t think in history. I can tell you, it does not come by accident. There was a lot of blood, sweat and tears that went into this over many, many years by many people, OK? [Inaudible] We are uniquely positioned to come — to address complex use cases. As noted in the prepared remarks, we have chosen in this particular case, our reliability, as well as use cases and some of the examples, ability to handle messages and just call times in general, call times what’s happening during the call is a big deal for many enterprises.

This one, in particular, is a meaningful retailer. They also have, as part of their retail establishment, the Hall’s Pharmacies. So what’s happening during on hold times its incredibly important, and we just have better ways of handling that. But I want to turn the mic over to Sonalee here in a sec, but I also want to give you the big picture.

The big picture is why we’re winning in enterprise, is again, good product, a robust, reliable, fully featured. But very importantly, a huge amount of greenfield still left. I really want people to internalize the fact that in spite of all of the rhetoric about, oh, video is taking over, messaging taking over, cloud taking over, which by the way we have all of those modalities as well. But voice continues to be the primary mission-critical medium of communications for people.

And especially in our gold verticals, which includes retail, includes healthcare, includes financial, etc., we can easily see 100 million seats out there. Salesforce has just published a report saying that prevalent modes of B2B communications are voice and email, and it is not video messaging. And this is where we shine. And largely by far not least, why we continue winning there and we have stabilized our growth in double digits still is focus.

There was rhetoric as you know, relatively recently that RingCentral is abandoning enterprise. Well, this is our way of showing that is not quite. We’re not abandoning enterprise, we are doubling down on enterprise. We absolutely see our right to win there.

And I’ll tell you what, as we have focused on enterprise and we’ll continue focus, we will also be redoubling our efforts on SMB. It’s been relatively underperforming in a very challenging macro for SMB, but we think that there is still a lot of juice left there. We also have a very strong position in the — very strong and protectable right to win. So let’s say, I’m cautiously optimistic that we’ll be showing good results there as well moving forward.

Sonalee?

Sonalee Parekh — Chief Financial Officer

Thanks, Vlad. And thanks, Kash, for the call out on free cash flow. Yes, we are very, very proud of what we delivered. So as you know, last year, we took really important steps to transform the profile of our cost base, and we expanded operating margins by nearly 700 basis points year over year.

And the efficiencies and productivity benefits realized are now reflecting in a big way, not only on operating margin, but we’re seeing it in free cash flow, with — if you look at where I’ve guided today, our unlevered adjusted free cash flow is expected to grow 34% this year. And free cash flow margins are expanding by about 370 basis points based on that updated guidance. So free cash flow margins are really starting to converge with operating margin. This is a trend that we sort of telegraphed because we’re realizing the positive impact of the lower intensity of deferred commissions that we’re amortizing over the last couple of years through the P&L.

And we’ve also realized significant working capital efficiencies and shifting more of our long-term contractual commitments to upfront payments. So the power of the growing free cash flow, coupled with our focus on driving SBC down, which hopefully you know this as well, provides a real opportunity to drive significant free cash flow per share growth and driving that growth in excess of both revenue and overall free cash flow growth. So this year, we expect based on the midpoint of our guide on free cash flow, that our free cash flow per share will grow about 36%, and that outlook has improved by about 10 percentage points since we last reported last quarter. So given the improvements in our free cash flow and the updated outlook we’ve given you on share count, which we now expect to reduce year over year, we hope that you will judge us on the strong free cash flow per share growth that we will continue to deliver on a sustainable basis.

Operator

The next question comes from Samad Samana of Jefferies. Please go ahead.

Samad Samana — Jefferies — Analyst

Hi. Good afternoon, and thanks for taking my questions. Also honored to go after Kash. So I love the order of the Q&A.

I hope you guys are doing well. Maybe first question, just Vlad, as I think about the largest deal, it’s, obviously, small in the overall context of the millions of seats that RingCentral has. But when I think about — that’s got to be one of your larger individual deals. So could you help us maybe double-click into what the time line looked like in terms of winning the deal, what led it maybe in terms of like the features, so on and so forth? And what the expected roll out of a deal of this size looks like just given how big the deal is, and it’s a signature win? And then, certainly, just — I’ll squeeze in a stub question for you upfront as well, which is on the upfront billing, does that — is there any discounting that’s going on to drive the upfront collections? Or is that just the customers who are agreeing to that and the timing doesn’t really matter to them? Thank you both for taking my questions.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Yeah, Samad. OK. Yes. Glad to have you in your pole position here on the Q&A list.

OK. So as far as the deal, it wasn’t one of the largest, it was the largest. So this is especially interesting, given, again, all of especially more recent rhetoric about our positioning in enterprise and Teams and all of them. Look, as far as how long, these types of deals are generally one- to two-year cycles.

This particular one happened to be right in the middle, 18 months, OK? And it’s — I already mentioned some of the differentiated features. This customer is rotating out of Skype for Business. So it was a competitive RFP process. We don’t always know who else is involved, but you can probably imagine the usual suspects.

And as I already mentioned to Kash, it really has to do with reliability and features, OK? And again, we don’t think that this is such an aberration for these deals, there are only so many of them out there to be had. But we do have other large installments. We have 20% of GTK which is — which we count as part of our enterprise segment, so they’re spending more $100,000 ARR with us. So we are very much active in large accounts.

We continue this, but we believe that this — we have a good chance to continue this being the case. And they really want to say this one more thing, again, this is getting all back into enterprise and Teams and how do we co-exist there. And we need to understand that there is Teams and then there is Teams Phone. We compete with Teams Phone.

And as you can see, we have some success competing against Teams Phone. We work and partner with Teams itself, OK? So we are an integral part or extension to Teams via available APIs. We provide or support the single pane of glass and that’s a major strength. We have really what we believe one of the best, if not the best Teams integrations on the market today.

So I hope that answers the question.

Sonalee Parekh — Chief Financial Officer

Yeah, and Samad, Sonalee here. On your question with respect to the accounting, no, there’s nothing to call out there. It’s really a mix shift. So as we grow in enterprise and the composition of enterprise’s total increases in our overall revenue, it tilts us to more upfront billings and longer-term contracts.

And that’s, obviously, much more common in enterprise to bill upfront than say, SMB, which is often month to month.

Operator

The next question comes from Ryan MacWilliams of Barclays. Please go ahead.

Ryan MacWilliams — Barclays — Analyst

Thanks for taking the question. Also continuing with the trend or the two-part question, one for Vlad, one for Sonalee. For Vlad, just given the macro uncertainty, how does your pipeline look like for the rest of this year? And have you noticed any trends in the pipeline, whether between SMB and enterprise or UCaaS and CCaaS opportunities? And then, for Sonalee, nice revenue result and free cash flow step up. But looks like the non-GAAP, where your operating margin guide was maintained.

Could we just use this as a conservatism really to the start of the year? Or are you leaving room for more additional sales and marketing and R&D investments this year? Thanks.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

OK. Great. Look, pipeline, so you see how we guided, we had a good quarter and what we believe is a strong guide as well. And so that should tell you that we feel relatively good and optimistic about the pipe.

You asked between enterprise and SMB, they’re very different because enterprise, again, is a year-plus cycle. SMB could be easily under six months in many cases, one to three months. So pipe there is a lot less — it’s not, not important, but it’s just a very different dynamic there. But again, overall, we feel that we are finding bottom, if you will.

And you have seen our enterprise rates stabilize over multiple quarters. You have not yet seen this from us in SMB, but we are optimistic that we’re not far from that as well. And given the size of the greenfield opportunity, which is still — we’re still under 10 million seats ourselves, right? And we’re is the lead by pure seat counts according to third-party research. Some of you may have caught our Wall Street Journal ad recently, which details are on the research.

With the overall opportunity just in the enterprise, OK, being the $100 million, that’s a long way to go. And given that we are still doubling and tripling down on innovation, we are infusing AI across the entire portfolio and not just limiting it to our new products, for example. Again, we are 100% optimistic that we will continue holding our own and not to disappointing people. OK.

I think that was the question.

Sonalee Parekh — Chief Financial Officer

Yeah. So on the margin question. So overall, we’re really happy with the improvements we’ve driven in profitability over the last two years or so, margins have gone from 10% to, as you say, 21%, to where I’ve held the guide today. I think, really, we feel we need to balance growth versus profitability and we need to maintain some flexibility to be able to go after attractive investments in either product innovation on the marketing side.

We talked about the gold verticals, vertical-specific campaigns. Yes, we really see it as a balancing act. And on operating margin, I would say that I’ve guided closer to the pin. Hopefully, what you’ve seen is that we took up free cash flow margins from 17.5% to 18.5%.

That’s adjusted unlevered. So hopefully, that answers the question.

Operator

The next question comes from Siti Panigrahi of Mizuho. Please go ahead.

Siti Panigrahi — Mizuho Securities –Analyst

Thanks for taking my question. I wanted to ask you about the new products that you expect to hit $100 million ARR by end of next year. Which one do you feel more excited about between the RingCX, RingSense and RingCentral Events? And also, how do you — as you keep adding features to RingCX, how do you try to position your product versus your partnered product within their installed base?

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Yeah, sure. OK. Well, for those of you with multiple kids, it’s like asking which daughter you like best. So there’s no politically correct answer to that.

We like them all or else probably we would not be investing in some of them. As far as — they’re very different. So we’re talking about three products, one of which is really not the product but the family of products. So it’s RingCX, which is our native contact center, it’s RingCentral Events and its RingSense for Sales, but it’s the first in a family of products for us because we expect to be introducing RingSense for other verticals and industry-specific solutions.

I think, it’s easiest to quantify RingCX because the CCaaS market is relatively well covered and well understood. And this is getting to the second part of your question, RingCX differentiates on ease of use, pricing and packaging. And very importantly, it’s an AI-native product. So AI is infused there from day one.

And of course, it seamlessly integrates with RingEX, which is our flagship UCaaS product. So we have internal projections, which we are not going to share at this point. But suffice to say that we feel confident that our goal of $100 million ARR across all three products is achievable, OK? We mentioned some numbers, we have approximately doubled or even more than doubled customer counts on both RingCX and RingCentral Events and that’s just quarter over quarter. So what was, obviously, a very strong growth, there is strong demand for the both of them.

Events. I think, what did we share, Sonalee? We said, well, we can do it in, I think we got 25% quarter-over-quarter growth, which is still very, very strong. So again, it’s very early for all of them, but very promising, OK? And I tell you what, I like having multiple horses in this race. They all tell each other when we have an event sale, for example.

It absolutely opens opportunities for us with CX, with RingSense and with EX itself, so it’s a virtuous cycle.

Operator

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

Jamie Faucette — Morgan Stanley — Analyst

Hey, this is Jamie, on for Meta. I think, maybe just following up on that last point, great to see the traction you guys are getting with RingCX. Are you able to provide any detail on how much of that base comes from existing customers versus new? And then, just as a follow-up to that, have you seen any conflicts with the partnership that you guys have with NICE? Are you running into any challenges in terms of what to present to the customer? Or have you seen NICE try to take any of those customers direct?

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Yeah. To your last question, look, it would not be in the spirit or for that matter, letter of the agreement for them to take them direct. So we hope not, OK? As far as base or not, when you say base, some of them are coming from our base, but not necessarily from the — RCC, which is in contact base, NICE base. We’re not trying to convert those to CX.

Again, the two products are very different, in many ways complementary. RingCX is much simpler to use, install, very different price points, more aggressive price points. Of course, we have owner economics on it. So margins are healthy.

But it’s really just designed to address simpler use cases, more mass market, if you will, as opposed to the RingCentral Contact Center, RCC, which is flagship industry-leading Gartner and [Inaudible] product that NICE had. So again, we have very clear rules of engagement, self-imposed internally. When we get an inquiry or a lead, we qualify which products to present it to or which products will be presented to the customer. And once we do, we will be — we’ll walk into that fast, OK? So it’s rare to see a tug-of-war between EX and CC first.

Operator

The next question comes from Tim Horan of Oppenheimer. Please go ahead.

Tim Horan — Oppenheimer and Company — Analyst

Thanks, guys. Two also, if I might. On RingCX, do you think you’re expanding the number of agent seats out there or are companies adding contact center capabilities? Or is it kind of more of you taking market share from existing? And then, secondly, on Microsoft Teams, do you have a sense of what percentage of Teams users now are using it for external phone calls and maybe a sense of where that can kind of go to? Do you maybe just have a rough sense of what percent Microsoft has versus other outsourcers like yourself? Thanks.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Yeah, no, I mean, Microsoft, they have their own numbers. Our use within Teams, I mean, I think it’s a well-known fact that people use Microsoft more for internal than external. Our gold vertical — so let me answer it this way, our gold verticals all tend to be B2C, OK? So whenever you have a consumer needing to access their brands, OK, whether it be healthcare or financial or retail, these are just some of these, what we call, gold verticals. This is where we shine, OK? And this is very, very large market sale and huge amount between greenfield still left there.

Sorry, what was the CX part of the question?

Tim Horan — Oppenheimer and Company — Analyst

Trying to understand, do you think the number of agents are growing in CX? Or are they shrinking? Your price point is pretty low and easy to use. Do you think you’re enabling people to kind of go into this business for the first time if you’re a small business, but maybe didn’t have this capability before?

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Absolutely. So if your question is, well, our count of agents is, of course, growing, very rapidly because we are early in that cycle, and we are just — I think we have been doubling quarter over quarter, obviously, we’re growing quite nicely. But if your question is about overall number of agents in the industry growing? That’s a really interesting question. And obviously, there is this line of thinking that AI will replace agents.

For now, we are seeing more AI augmenting agents. I do believe that over time, overall number of humans in the industry will stabilize and be decreasing. I also subscribe to that. And for that reason, we’re building AI and agent assist copilot and even agent-replace capabilities into CX.

So this is absolutely taking place. It will always be the case and already is the case that the bot is much cheaper than a human being. It’s not as good yet, not a versatile, and this is across the industry or else there wouldn’t be any agents left. You made an interesting point about small businesses, they didn’t have access to this type of functionality before.

That’s — I would agree to that. That’s just largely true. I can tell you from my personal interactions with small and medium type businesses, many of them actually pride themselves on the fact that they provide human assistance and not — if you hide behind bots, and this is their way of differentiating and kind of showing the human touch and human TLC. I do expect that to stay for the foreseeable future as well.

So there are different dynamics here. As a business and at the high level, how we approach it is saying, look, the customer. If you want to have a good, solid cost effective solution of empowering and lighting up your human agents, here is the solution. As you are ready, here is a simple and relatively seamless path of augmenting their experience, your agents’ experience and the customers’ experience.

And as you get more comfortable, if you feel that you can start reducing the number of agents, that’s just fine as well because here is this technology, which will allow you to do that without leaving the platform, OK? So it’s more of an evolution than the revolution as well we see and we are structuring that road map.

Operator

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

Brian Peterson — Raymond James — Analyst

Thanks for taking the question, and congrats on the quarter. So Vlad, the tone in GSP was notably strong this quarter. I’m curious, is that a broad-based comment? Or are there a couple that are really driving that strength? And how are you thinking about that growth profile through that channel over the next couple of years? Thank you.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

With GSP. So yeah, thank you for asking that. Look, GSP is a hidden gem, and actually, I’m surprised that not more people asked this question and concentrate on this. Because this is one area where we really have built a practice that is unrivaled in the industry.

If you think about historical terms, a few years ago, BroadSoft, which was an on-prem provider, really had licensed something like 700 carriers worldwide, which is really almost all of them. And they provided them with software licensees. In many cases, they were perpetual licenses, OK, which carriers have just bought in bulk. And it sounded wonderful and the company has a nice exit and Cisco now owns them.

The thing here, this platform has not been innovated on in a number of years now. It is still on-prem. There is not a natural path to the cloud and telcos are — and when I say telcos, it’s not just telcos. It’s telcos and cable providers as well, OK, for example, Charter Communications is a very valued member of our GSP partners.

And they’re doing extremely well, OK, with our product. So they are just increasingly realizing that they have to move on this day and age really almost unsupported software that’s out there with BroadSoft, which has seen it prime, and there are mass migrations underway. So we are very bullish about the channel. We are seeing both growth from, call it, same-store sales where each and every individual GSP is growing nicely, as well as we are adding new major logos.

We just announced Optus, Australia’s second largest, I believe, owned by Singtel. So you can imagine that — there are conversations across the board there. And look, BroadSoft, we have a number of very good people from what used to be BroadSoft. We know the playbook.

We know who the accounts are. We also are well aware of the fact that out of the 700 that they have, we have approximately 2% of those. So low runway there. And we will be — we expect to be sharing more in this later in the year and perhaps at our analyst day.

But it is definitely an area of strength and a very nice competitive model for us.

Operator

And our last question comes from Terry Tillman of Truist. Please go ahead.

Bobby Dee — Truist Securities — Analyst

Great. Thanks for squeezing me in. This is Bobby Dee, on for Terry. I’m curious with the RingEX rebrand.

I’m curious how the go-to-market organization has reacted and evolved with the change. Are there potentially some productivity gains on the table for more of a multiproduct platform selling approach? Thank you.

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Yeah. I think, people understand the reason for this. I think, general reception has been quite positive. They understand that by remaining from MVP, which was message video phone, to RingEX.

It does not mean that we’re bundling the multimodal strategy. It just means that we are redoubling on the experience part of it. It’s more about any modality, in particular, but more about integration of all modalities together. But even more importantly than that, is infusion of AI and semantic capabilities across the entire portfolio and across all modalities.

And this is what people are excited about. This is what won us as Best of Show at Enterprise Connect. And look, we’re in beta, we’re in close beta here, but expect that we will be showing and showcasing these capabilities even to this group, our coverage universe in the relatively near future. I can tell you that we are using these products internally and it’s a game changer.

It’s just amazing what you can do with AI if you apply it to a large network, just what kind of results can be achieved.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Will Wong — Vice President, Investor Relations

Vlad Shmunis — Founder, Chairman, and Chief Executive Officer

Sonalee Parekh — Chief Financial Officer

Kash Rangan — Bank of America Merrill Lynch — Analyst

Samad Samana — Jefferies — Analyst

Ryan MacWilliams — Barclays — Analyst

Siti Panigrahi — Mizuho Securities –Analyst

Jamie Faucette — Morgan Stanley — Analyst

Tim Horan — Oppenheimer and Company — Analyst

Brian Peterson — Raymond James — Analyst

Bobby Dee — Truist Securities — Analyst

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