RingCentral, Inc. Q1 FY2020 Earnings Call

Greetings, and welcome to the RingCentral First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Goodman, Head of Investor Relations for RingCentral. Thank you. You may begin.

Thank you. Good afternoon, and welcome to RingCentral’s First Quarter 2020 Earnings Conference Call. I am Ryan Goodman, RingCentral’s Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Anand Eswaran, President and Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand, and Mitesh, followed by Q&A. Some of our discussions and responses to your questions will contain forward-looking statements, including our second quarter and full-year 2020 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today’s discussion. In particular, our business is currently being impacted by the COVID-19 pandemic. The extent of its continued impact on our business will depend on several factors, including the severity, duration and extent of the pandemic as well as the actions taken by government, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. 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. I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, GAAP to non-GAAP reconciliations, our periodic SEC reports, a webcast replay of today’s call and to learn more about RingCentral. 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, let me turn the call over to Vlad.

Good afternoon and thank you for joining our first quarter earnings conference call. Before we begin I'd like to first take a brief moment to address the current macro environment. We are living in an unprecedented time of global uncertainty and disruption. Our priority at RingCentral is the health and safety of our workforce, and we acted quickly in transitioning to the work from home model. As a leader in unified communications as a service, we believe we have a responsibility to help our communities maintain business continuity. To that end, we began offering RingCentral Office for free to various educators, healthcare providers, and non-profit government entities, as well as news media organizations. We also announced a free offer for our cloud contact center solution to those affected by COVID-19-related challenges. We're providing our cloud communications and collaboration solutions through organizations that are working globally and tirelessly to mitigate the impact of this crisis. This offer has been well received, and we now have over 4,000 organizations using RingCentral. We wish our customers, partners, employees, and shareholders good health and safety in the days ahead. Now, on to Q1; we delivered a strong first quarter with continued strength in mid-market enterprise and channel. We also recently made several key announcements. First, we introduced RingCentral Video, our own video and meeting solutions, completing RingCentral’s differentiated message, video, and phone, or what we refer to as MVP, platform. Second, we announced the general availability of Avaya Cloud Office by RingCentral, delivering on the promise made six months prior. Third, yesterday, we announced a new unified desktop app, an entirely reimagined user experience for enterprise communications that is available both on Windows PCs and Macs. Key differentiators for our new desktop apps include close integration and real-time switching between messaging, video, and sound communications, as well as switching of meetings between devices. And today, we are happy to announce that Phil Sorgen has joined us as the Chief Revenue Officer, reporting to our President and COO, Anand Eswaran. Most recently, Phil was the Corporate Vice President for the U.S. enterprise business at Microsoft. We’ll discuss these key announcements later. As to our financial performance, revenue and non-GAAP EPS exceeded our guidance. This guidance continued to be mid-market enterprise in China. We continue to see strong contributions from our vertical market initiatives focused on education, financial services, and healthcare. These initiatives yielded good results, including an over 15,000 seat win with Cornell University and over 8,000 seat wins with a Fortune 500 insurance provider, as well as multiple accelerated healthcare wins. Key metrics for Q1 were growing across the board. Total revenue grew to $268 million. This is a 33% increase year-over-year and is above the high end of our guidance range. Total annual recurring revenue, or ARR, surpassed $1 billion for the first time. Mid-market and enterprise continues to be a key driver of our performance. We define mid-market and enterprise as $25,000 or more in ARR. This grew 52% year-over-year to a $524 million business. Enterprise, where we find those customers with $100,000 or more in ARR, grew 59% year-over-year to $318 million. General ARR grew 52% year-over-year to $329 million. Looking forward, in this challenging macro environment, companies are facing the reality that legacy on-premise voice-only systems can no longer meet modern work-from-anywhere requirements. We believe unified communication and collaboration cloud solutions are key for productive customer, partner, and internal interaction. We believe RingCentral is uniquely positioned to meet the demand. We have a differentiated enterprise program, global, scalable, and secure unified messaging, video, and phone platform. In particular, RingCentral provides cloud-based enterprise-class global PBX capabilities seamlessly integrated with comprehensive native team messaging and video meeting capabilities. With the recent introduction of native RingCentral Video capabilities, RingCentral customers are now able to be wholly engaged and productive from anywhere, on any device and in any mode. Very importantly, we can onboard new customers quickly and efficiently without ever having to go on-site, which is especially critical in the current environment. It has never been more clear that customers use RingCentral for a lot more than just connecting to legacy desktop phones. In fact, we saw our app downloads increase over 180% in April versus February, along with strong usage metrics across all modes of communication. To that end, total messages posted in April are up 70% versus February. Total video minutes in April are up almost 200% versus February, and total phone calls in April are up over 150% versus February. The triple-digit growth in business voice in the last two months makes it abundantly clear that business voice is as important as ever. We've also been very pleased with the uptake of RingCentral Video or RCV capabilities. We're seeing rapid adoption of our RCV, and now we have over 1,000 organizations using RCV as their primary video meeting solution, and this number is growing very rapidly. We are also excited to see our strategic partners embrace RCV in their UCaaS offerings. This includes AT&T with upcoming collaborations and Avaya with Avaya Cloud Office by RingCentral. As I mentioned, we launched Avaya Cloud Office on March 31, delivering on the promise made nearly six months ago. At launch, Avaya signed a number of leading master agents to sell ACO, including Germany, Stanford, Avant Communication, Phoenix, and Polaris. Today, we have onboarded over 1,700 channel partner agents in just about one month since the launch. It's too early to tell, but market reception is encouraging. COVID-19 has put an additional spotlight on the limitation of legacy on-premise communications systems. Longer term, we believe that work-from-anywhere, particularly work-from-home, will continue to be a key requirement for businesses worldwide. The business communications solutions that enable work-from-anywhere are now more critical than ever. RingCentral has always been at the forefront of enabling people to work from anywhere, use any device, and communicate in any mode. With this backdrop and given our recent focus on our differentiated MVP platform that fulfills a mission-critical need for many businesses, we’re confident that, in the long term, the cloud will continue to win, and RingCentral will continue to win through the cloud. Now for some additional color on Q1, I will turn the call over to our President and Chief Operating Officer, Anand Eswaran.

Thank you, Vlad. Good afternoon, everyone. I would like to start by extending my wishes for the good health and safety to you, your families, friends, and colleagues. I will begin with an update on how we are managing the business in this COVID-19 environment. Then I'll provide some examples of how we are empowering our customers to succeed in these unprecedented times. But first, I wanted to welcome our new Chief Revenue Officer, Phil Sorgen, who started this week. As Vlad shared, Phil is a 24-year Microsoft veteran and was most recently the Corporate Vice President for the U.S. Enterprise Commercial business. Prior to that, Phil was the Global Channel Chief, harnessing the power of all partners to drive growth for Microsoft. He also led U.S. small and medium businesses and served as President of Microsoft Canada in earlier roles at Microsoft. We are excited to have Phil join us. Phil brings 30 years of experience in leading sales and partner organizations at a global scale and is going to have an immediate and lasting impact. Starting the second week of March, we had efficiently transitioned to working from home across most of our global locations. This transition went smoothly as we have always used our cloud communications platform for customer, partner, and internal communications. Our employees have maintained their high productivity, allowing us to close the quarter on a strong note. Thank you to the RingCentral family for the resilience and commitment you demonstrate every day towards our company, our partners, and our customers in these difficult times. In Q1, we were privileged to have helped many of our existing and new customers transition effectively to work from home while remaining productive in these challenging times. We saw new customers come on board to the RingCentral platform in key verticals like education, healthcare, and financial services. We saw existing customers accelerate deployment and leverage more elements of our platform and portfolio, and we saw customers take advantage of our differentiated unified application across messaging, video, and phone, which we refer to as MVP, and our global capabilities to help keep their employees safe and productive. Let me just share a few examples. In higher education, we continue our progress with top-tier universities. Our most recent win was with Cornell University, as we will provide our MVP communication solutions to their 15,000-plus users. In launching an initiative to modernize its legacy on-premise communication systems, Cornell required a platform that enabled complex call-handling services, emergency notifications, and mobility. Leveraging our deep PBX expertise and unified MVP solution, we've been able to meet these needs while also delivering meaningful cost savings. In healthcare, an example is PM Pediatrics, a pediatric urgent care provider. In this time of elevated need, they needed to optimize resources across their 40-plus locations to better serve their patients. PM Pediatrics chose RingCentral Office to seamlessly manage demand across all of their locations. We were able to roll this out in a matter of weeks and deliver full compliance for security and privacy requirements. Another example is an existing customer of our RingCentral Office solution we discussed in February, Aveanna Healthcare, the nation's largest provider of pediatric home care. This customer wanted to urgently transition its 300 contact center agents to work from home in less than a week. We were able to deploy our Contact Center solution to enable these agents to work remotely. An example of a large enterprise win with our unified communications platform is Mutual of Omaha, a Fortune 500 provider of insurance and financial services. Mutual of Omaha selected RingCentral to further enhance its communications platform and support its more than 8,000 associates, sales representatives, and contractors nationwide. We are also excited to have been selected as the new communications platform for the Detroit Lions. The Lions embraced the complete MVP solution for the first virtual NFL draft on April 23. This is a great example of a mission-critical use case where the customer required a proven, trusted, high-reliability solution. Global organizations face even more challenges with disparate legacy on-premise systems, making it difficult for their workforces to communicate effectively. For example, a cybersecurity provider recently selected RingCentral’s global office solution, which will enable their 2,000 users to be on a global unified solution with MVP capabilities across 13 countries. In closing, it is now more evident than ever that customers need a trusted, reliable fully featured unified cloud communications platform that can meet their emerging business needs at a global scale. We are inspired by our customer and partner success stories and are deeply thankful to them for trusting RingCentral with their mission-critical communication needs. While these are trying times for everyone, we are extremely optimistic about our future. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

Thanks, Anand, and good afternoon, everyone. I'll begin with a few highlights of Q1 results. I’ll then spend some time addressing how COVID-19 is shaping our business and wrap up with how that translates into our 2020 outlook. Q1 was a solid quarter on multiple fronts, and we exceeded guidance and consensus across the board. We surpassed a $1 billion ARR, growing at 33%, and saw strong momentum in mid-market enterprise ARR with over 50% growth. We successfully raised a $1 billion convertible note at a 0% coupon, strengthening our balance sheet. We used a portion of the cash raised to repurchase about 38% of our prior notes. Operating and free cash flow includes a non-recurring outflow of approximately $14 million of imputed interest on the repurchase notes. Excluding this, our free cash flow margin would have been approximately 5%. To provide better clarity into cash flow generated by core business activities, we've introduced a non-GAAP free cash flow metric in our press release that excludes this allocation. We exited the quarter with $762 million in cash. Now, I'd like to take a few minutes to address how COVID-19 is shaping our business. We continue to receive strong momentum across the board as companies seek to enable employees to communicate effectively in the current work-from-home environment. In our large upmarket customers, COVID-19 has served as a catalyst for some of our existing customers to accelerate adoption of RingCentral across their footprint and use our product across all modes, messaging, video, and phone. Unsurprisingly, small businesses in some verticals like retail, travel, and hospitality are seeing elevated churn. We would expect some variability in this area as long as the economic impact of COVID persists. Small businesses within these verticals account for less than 10% of our overall installed base. We're also seeing some customers extend their payments. However, on a positive note, nearly all of them are actively using our platforms. We are closely working with our customers to help them be successful in these difficult times. We hope that these businesses emerge even stronger and with increased loyalty towards RingCentral. Moving to our phone revenue piece, which has historically been about 5% of our total revenue, due to shelter-in-place orders, we are seeing some demand push out for desktop phones. We resell desktop phones as a low-margin add-on to our recurring and accretive subscription business purely for our customers' convenience and is not core to our long-term strategy or recurring revenue growth. As for our core platform, as Vlad mentioned, we have seen customers increasingly leverage the RingCentral app, both on laptops and mobile devices with very high adoption and usage, which is an indicator of long-term retention and customer lifetime value. Switching to our 2020 outlook, we’ve stated the headwinds and tailwinds mentioned above. We’ve contemplated and stress-tested various assumptions about what the macro environment could mean for our business. We believe that in the ensuing outlook, we have conservatively factored in a potential range of outcomes created by COVID-19. With that, let's turn to the outlook for 2020. For subscription revenue, we are raising our subscription revenue forecast to be between $1.0 billion to $1.04 billion for an annual growth rate of 25% to 26%. This reflects Q1 strength, positive new logo trends in early Q2, and a proven outlook for the remainder of the year, given the volatile macro environment. We have also assumed a $5 million to $10 million FX headwind from deterioration of international currencies against the U.S. dollar. Our other revenue is being adjusted to be between $92 million and $95 million for a growth rate of 8% to 12% versus our previously implied guidance of 25% to 27% growth. These adjustments assume a further reduction in desktop phone demands. Incorporating our positive outlook for subscription revenue and lowered assumptions for other non-recurring revenue, we expect our total revenue to be between $1.116 billion and $1.125 billion for an annual growth of 24% to 25%. We are reiterating our non-GAAP operating margins of 9.6% to 9.7%. We are committed to an annual target of 40 to 50 basis points of expansion and redistributing near-term savings from travel and other discretionary items into growth and innovation. We expect non-GAAP EPS to be between $0.91 and $0.94 based on our share count of 93.5 million shares. This includes $0.02 of headwind, which is a decrease from our previous guidance, due to lower interest income assumptions given recent trends. We've followed a very similar framework for our Q2 outlook with subscription revenue range of between $244.5 million to $246.5 million, up 26% to 27% growth, and other non-recurring revenue of $15.5 million to $19.5 million, down 14% at the midpoint. In summary, we are fortunate to operate in a market that is currently witnessing a noticeable increase in demand. RingCentral’s solutions address the mission-critical needs for businesses, which should bode well for long-term customer acquisition and retention. The long-term outlook for the cloud communications market is stronger than ever. In a market that was already growing rapidly, the new work-from-home requirements provide an additional incentive. It is now clearer than ever that on-premise systems simply cannot serve the needs of the new work paradigm. We believe that in the post-COVID-19 world, many things will change and that the modernization of business communications through the cloud will be among key priorities. As cloud adoption accelerates, we are focused on making sure that RingCentral continues to win in the cloud. To that end, we are excited about the launch of our new video product, which will provide further differentiation to our leading UCaaS platform. We are also confident that our strategic partnerships, including those with AT&T, Atos, and Avaya, will continue expanding our reach to millions of prospects across the globe, which bodes well for our long-term growth. We pride ourselves on profitable growth and are committed to our role of operating at or above the rule of 40 long-term, which we again achieved in Q1. We have a large, loyal customer base, a profitable business model, and a strong balance sheet, which allows us to continue investing aggressively in product innovation and go-to-market efforts. With that backdrop, we are confident in our ability to lead in the $50 billion-plus UCaaS market. Finally, on behalf of RingCentral, I wish you, your team, and loved ones health and safety. With that, let me turn the call over to the operator for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Terry Tillman with SunTrust Robinson Humphrey. Please proceed with your question.

Yeah. Thank you. Good afternoon. It's good to see the MVP performance. Vlad or Anand, maybe my first question relates to, it's one thing to help kind of turn on the MVP capabilities but what we're looking at here with your business is particularly with the bigger enterprise customers, they've got to rethink the way they're doing business and how the workers work. So it does seem like a great opportunity for systems integrators and some of the strategic partners. So I'd love an update on Atos? And just maybe other conversations or opportunities you can have with other global SIs or just other partners beyond the service providers? And then, I had a follow-up.

Absolutely, Terry. That's a good question. So, let me just answer that. This is Anand. Firstly, hopefully, everybody's family is safe and healthy in these surreal times. And thank you for still making the call and listening to us. So, on Atos, we are just early in our work and relationship with Atos. Right now, we are targeting upmarket customers, as you can imagine, and we’re experiencing enormous interest from big brands and large customers. We feel really good about our joint go-to-market strategy, and we are already seeing a lot of traction with all of these enterprise customers. Since we just got started, the sales cycles are actually much longer. However, we are excited about the progress, and you would expect to see some of these come to fruition over the next months.

Got it. Thanks for the answer. And then I just had a follow-up. You know we’d like to look at that net add for office ARR, and I believe it was $66 million of strong result. Maybe you can just kind of dive deeper into the drivers of that and how we should think about the seasonality of additional ARR as we move through the year? Thank you.

Sure, Terry. Yeah. I'll double-click on the Q1 strength as you mentioned. So a couple of things stand out for us this time. First, we did see strong new logo momentum across the board. If you take a slice of the large deals over $1 million, we had the best Q1 ever. It's fascinating to see that we had this drumbeat even during the COVID period. If you look at all the million-dollar deals, about 60% of those deals actually closed in the second half of March, which underpinned the secular shift in this new work paradigm. Secondly, deal sizes are getting larger, especially in the upmarket segment. If you take a slice of these $1 million deals, our total contract value deals saw a 30% year-over-year growth in the TCV itself. So, new logo momentum, deal strength, and if you now layer on the product dimension, which is Contact Center, we did see a year-over-year twofold increase in deals for Contact Center over the $1 million threshold. So we were fortunate to be in this secular shift market during a significant transition. In terms of seasonality, I wouldn't expect any different seasonality; it will largely be backend loaded for us. Even with Avaya kicking in towards Q4, we've taken a conservative approach to our guidance, including considerations for foreign exchange.

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

Hey, guys. Thanks for taking my question. Solid job given the environment. You know maybe following up on Terry's commentary for Anand, Anand, you know Terry asked about it, but let's talk about Avaya. Obviously, the Avaya relationship is a huge part of future growth. Just you’ve talked about traction a little bit and Vlad did some comments but we'd love to get some more color on sort of the early traction you've seen there and anything you want to highlight given the Avaya deployment not so long ago, about a month ago. But we'd love to understand a little bit more detail around what's happening with Avaya and the rollout there?

Absolutely. The first thing I’d call out is that we launched the joint product on March 31. The entire company globally shifted to work from home just two or three weeks before that, and we’ve delivered on time, exactly as we expected, so we’re pretty proud of that. Now roughly a month in, I’d share that we’ve onboarded about 1,700-plus channel partners and several master agents. The early partner engagement, customer interest, and customer feedback have been phenomenal, so we're pretty excited about that. April trends, whether it’s pipeline, opportunities, leads, or conversion velocity, indicate great prospects, and we're optimistic about the long-term trajectory. As you've heard from us, we are confident that you’ll start to see ACO contributing towards the end of 2020. But April trends make us comfortable with our earlier commitments.

Got it. And a quick follow-up for Mitesh. Mitesh, if I look at the Q2 guide, it looks like it’s up 1% quarter-over-quarter. By my calculations, I think you have a 1% or 100 bps FX headwind. So I think it’s the same as Q1, like a 2% quarter-over-quarter sequential guide. I’d love to clarify that, if that’s correct. And then, two, Anand talked about early trends, you talked about positive early trends in Q2. How is that reflected in guidance? I'd love to understand sort of how you guys have built that into guidance? Thank you.

Sorry, I was on mute. Yeah, Bhavan, let me start with your second part of your question first. Regarding trends, which I mentioned, April actually was a very strong start. Our new acquisitions are up 40% in April year-over-year, and that's the fastest start to a Q2 I've seen in my eight years at RingCentral. So, that's part one. We are also seeing acceleration in upsells in some cases where upmarket customers want to respond quickly in this crisis to enhance their employee productivity. So, we see that trend as well. Thirdly, in terms of churn, we have a diversified base of customers with no major concentration, but we do see some pockets of churn, as expected, in some of the SMB segments in challenging verticals. That’s the positive picture versus the current backdrop. Now, projecting forward, what's in the guide assumes that the economy doesn't materially improve until Q4 and that the work-from-home trend continues. That's one aspect. For subscription revenue, we’ve also conservatively assumed potential risks in terms of high turnover in SMBs. Regarding your first question about the guidance or sequential growth, yes, that’s correct. We do have a point of currency headwind that persists starting in Q2, so if you normalize Q2, and compare it to our Q1 guide, yes, you'd see that it looks very similar. We have accounted for a bit of conservatism given the macro, but overall, no substantial changes were made given the strength. Lastly, I want to say that our management team is ready to react. If the macro improves dramatically, we expect upside in the second half. That's the best way to summarize it.

Super helpful. Thank you, guys. Thanks again for taking my questions. A nice job.

Thank you. Our next question comes from the line of Mike Turrin with Wells Fargo. Please proceed with your question.

Hey there. Thanks. Good afternoon. Good to hear everyone sounds safe and well. Vlad, we saw the launch of the new RingCentral Video product early last month. We're impressed you've been able to keep the product roadmap moving forward in this environment. Is there anything else you can share around what you've seen there in terms of adoption or usage so far, understanding it's still early?

I don’t know if Vlad is muted. But let me just – let me just take it, as Vlad comes on. So, a couple of things here. It goes back to what I said about ACO. We launched RingCentral Video right in the middle of the lockdown, on-feature and on-time, which we are proud of. Our total video minutes in April are up over 200% versus February. We are seeing a lot of that translate into the RingCentral Video product as well. We’ve been using RingCentral Video internally for over a year, and with customers for over nine months in beta, and we're seeing that translate in traction with AT&T, Go Financial, and just announced how they were able to move and transition their entire workforce in a matter of a couple of days over to RingCentral Video and to working from home. So that was great validation. We talked about Worldwide Vision, which is using RingCentral Video to continue their work from a non-profit standpoint, especially amid the COVID crisis. So, early feedback, usage, and adoption in the last 30 days has been really encouraging, and we're proud of that. Vlad, are you on? Anything you want to add?

My apologies. No, my apologies! I did the Mitesh thing, which is I gave a beautifully thought-out speech while on mute. So, I think you covered the highlights. Look, I think the short version is we are quite pleased, not only with the timing of being able to launch it amidst these challenging times, but the product holds up well. We built it based on our well-established reliability and security principles over the years. We're seeing this translate nicely and holding up, knock on wood. Customer feedback is positive; analyst feedback is positive. I think there is positive press from third parties commenting on the product. We have thousands of customers in business, as many more for users. We at RingCentral use it internally with thousands of people who are there. So, look, it's only the beginning for us. I think the product level is good, and we expect rapid improvements as we have a lot of effort focused here. Lastly, we mentioned this in our prepared remarks; some NFL teams used it for drafting, which highlights security, reliability, and trustworthiness. They chose us over more established options for those reasons. We had a major win with RCV, and we expect it to grow.

That's great. Maybe one for Mitesh. That's a lot to go through in a limited amount of time. I wanted to ask about additional growth drivers that weren’t mentioned in the prepared remarks, the AT&T partnership. Any updates you can provide in terms of how that's progressing would be helpful as well? Thanks.

Sure, Michael. No, good one. You are correct; there’s a lot to unpack in this transcript. So, regarding AT&T, we saw very good momentum again. If you double-click on a couple of the drivers, we did see an increase in both direct and channel participation, meaning more parties are reselling our AT&T product. That's one major factor leading to a higher pipeline. We also saw churn improving in the base. Churn is reducing sequentially over the last couple of quarters, and that's a tailwind for future growth.

Thank you. Our next question comes from the line of Kash Rangan with Bank of America, Merrill Lynch. Please proceed with your questions.

Hi. Thank you very much. Your CFO does such a good job, he anticipates all our questions. It’s so hard to ask a good question, but I’m going to try and outfox him. So, Vlad, maybe a question for you, or Mitesh can share as well. Congratulations, and welcome to the RingCentral family. As you look at the long term beyond 2020, into 2021, Vlad, what are the vectors that drive RingCentral’s business? Among those vectors, what could end up being stronger or weaker than anticipated? Thank you so much.

Maybe I can start, and then Vlad can certainly add the bigger picture perspective. So, Kash, no, you have indeed outfoxed me with a broad question. We believe that the COVID impact could be a glass-half-full situation for us. It's functioning more as a tailwind than a headwind because this was a much-needed catalyst for the transition from on-premise to the cloud. In terms of risks, there exist challenges in the SMB segment, particularly in some challenging industries. Thankfully, that segment accounts for less than 10% of our installed base. Conversely, the new logos we talked about right! This new demand we are seeing from customers increased by about 40% in April. These customers are quickly adopting to be more agile and weather the crisis. Long-term, we will have a base of energized and loyal customers with greater lifetime value because they're now here to stay. On top of that, we have the AT&T partnership performing excellently, Avaya showing promising results, Atos coming on board, and we're also looking to capture incremental video demand over time. Moreover, we have a solid recurring revenue model that is very predictable and indicates higher marketing efficiencies. I expect that we can maintain the 'Rule of 40%' from both a financial and operational standpoint, and I hope to highlight that Vlad can further elaborate the larger picture.

To add a couple of thoughts here, as I reflect on long-term plans for 2020, 2021, and beyond, the key components fueling future growth mainly stem from our increased focus on the enterprise. Seventy-five percent of our total addressable market lies within enterprises, and we are investing to capture that growth. This drives much of our growth; as Vlad expressed in his remarks, we also plan to double down on partnerships, something our company is known for. International expansion remains a significant area of focus for us, as is our commitment to prioritized verticals. Our traction in healthcare and education today has been exceptional. We will continue to double down on our six key verticals, which serve as a catalyst for growth.

There are macro risks in these unprecedented times. However, at this point, our business is coping well. We are witnessing demand surge in several areas, and new logos and acquisitions are accelerating. Currently, I see more tailwinds than headwinds. Long-term, the increasing focus on work-from-home solutions will challenge traditional on-premise infrastructure, and it's clear that this will lead to a growing demand for cloud-based solutions like ours.

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi. Good evening; thanks for taking my questions. The new headwinds; as I think about customer behavior with more people working from home, if more customers are using soft phones, does that actually accelerate the ability to adopt RingCentral? How does using a soft phone versus a hard phone change the adoption dynamics for RingCentral software?

Yeah, it certainly has been. Soft phones are more convenient to use since one can carry them anywhere. We have always prioritized mobile-first communications in our platform. We are, in fact, observing broader engagement with increased app downloads. We've seen over a 180% increase in app downloads in April compared to February. And interest in mobility continues to drive more engagement. As we noted, we had increases in messaging usage. In April, we saw app downloads rise significantly, partly because this device is always accessible. As customers start using our app, they will realize how critical our MVP capabilities are, which enable seamless switching between modes of communication and devices. We expect increased usage and higher engagement from our customer base moving forward. We're also cautiously optimistic that with more IP usage, this will promote viral growth.

Great. That's helpful. And then maybe just a follow-up, Mitesh, regarding the outlook for 2020, any color you can provide about your assumptions in terms of geographies? How do you view North America versus EMEA versus APAC? Thanks again for taking my questions.

Sure, Samad. APAC is a very small part of our business. North America accounts for more than 90% of our revenue. However, we did see international growth that was faster than usual this quarter, resulting in some tailwinds. That said, there haven't been any substantial changes to how we are modeling the outlook over time. I think with the introduction of Atos and with Avaya coming online, we may experience some tailwinds internationally, but as of now, we have not factored in any major acceleration.

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Yeah. Thanks. Hi, guys. Even though it's early, I wonder if you could give us a sense of the demographics of the types of customers that are in the pipeline through the Avaya partnership. Are they skewing to either particular industries or particular sizes of organizations? Thanks.

The early pipeline, largely due to the circumstances we are in, skews toward verticals where companies are looking to accelerate. This includes healthcare and education, which we've been able to handle effectively. However, I would say there are no specific trends in terms of customer size or segments that deviate from our expectations.

Got it. And then one follow-up for Mitesh. Can you give some sense of what's happening in SMB? When you look across the entire business, do you have an idea of the representation from hard-hit industries like travel, hospitality, etc.?

It's about a little over 10% of our business that’s impacted. Although the upmarket segment shows a minor effect, we are still witnessing accelerated adoption as these customers want to quickly enhance productivity during this crisis, pulling forward some of the seats they would have implemented later on.

Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your questions.

Hi, gentlemen. Thanks for taking the question. As a lifelong Detroit Lions fan, I'm glad to hear you're helping them out. Mitesh, maybe start with one for you. I know a lot of people pay attention to ARR. I wanted to look at the enterprise contribution there. Could you shed some light on how much of that is actually making its way into ARR from your larger enterprise customers? What does that expansion opportunity ultimately look like?

Interesting question. ARR contribution from larger customers often shows up in smaller percentages in the end-quarter ARR metric. If you look at our top three deals this time, the top win with Cornell revealed that less than 10% of its deal value is reflected in our ARR. If you look at our top three deals, on average about 30% is recorded in ARR. When we sign larger deals, there is an exhaust pipe of land and expand potential that usually extends over multiple quarters or years. This means that not all of the value shows up immediately. To summarize, in this quarter, around 30% of TCV in the top three deals showed up in ARR, with more to come later.

And Mitesh, just in a similar vein, if we looked at the enterprise base more broadly, did you see migrations along that expand path so far this year? What's the current penetration into the video conferencing opportunity across your enterprise base?

Yes, great question, Brian. The broader picture is that since we are signing up new logos at a faster pace, our penetration into the enterprise base remains around 15% to 20%. This business has now surpassed $0.5 billion. Even if nothing changes and we just expand our existing installed base, we see significant upside potential moving forward.

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

Thank you. One of the interesting points mentioned was the acceleration of clients who previously had only some of their seats with you. I wondered if you could expand upon that. As we think through your top 25 customers, can you provide an estimate of how many of their seats have actually moved to the cloud already?

I don’t have that specific breakdown of your top 25, but in broad terms, I would estimate around 35% to 40% of the seats have been deployed. That said, if you evaluate our total data, more than half remains to be deployed.

Okay. One other question on extending payments; you mentioned that's one of the dynamics of the current COVID environment. To quote you, can you elaborate further on this and explain the accounting behind it, specifically how this will work for you over the next quarter or two from a revenue and receivables impact perspective?

Sure, George. That's a great question. In terms of working capital, there will inevitably be an impact. We are deferring payments to assist our customers during these trying times. So, we expect to see increased receivables in Q2. The good news is that we feel good about these customers; they are using our product actively. In terms of revenue recognition, deferring payments does not equate to lost revenue. As long as payment occurs in the future, it qualifies for revenue recognition. Still, we've adopted a conservative stance and included reserves in revenue, anticipating some customers won’t return. This cautious approach reflects our Q1 results.

Perfect. Thank you very much.

Thank you. Ladies and gentlemen, in the interest of time, we ask that you please keep to one question each. Our next question comes from the line of Karan on behalf of Meta with Goldman Sachs. Please proceed with your question.

Yes, hi. This is Karan on for Meta. Congratulations on the quarter. One question we had is just a little more color on your customer ads. How many took advantage of the free offerings versus paid offerings? Any color there would be helpful? Thank you.

Our offerings for free in response to COVID were geared towards notable sectors: the K-12 education system, government non-profits, and media organizations. Over the last month, we had about 4,000-plus organizations take advantage of those free offers to access our communication platform. We added more than 50,000 users as part of that initiative, and the momentum in this growth is continuing every single day.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session, and that also concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.