RingCentral, Inc. Q2 FY2020 Earnings Call

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

Thank you. Good afternoon and welcome to RingCentral's second 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 third 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 actions taken by governments, 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, our 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 second quarter earnings conference call. We hope all of you are safe and in good health. The pandemic has created unprecedented global challenges and is having a transformative impact on how businesses operate now and in the future. Cloud transformation of business communications platforms has become a priority as companies adapt to a work-from-anywhere environment. Businesses of all sizes now require communications solutions where employees can work productively with customers, partners, and peers from anywhere, on any device, and in any mode. We embarked on this journey of enabling cloud migration of business communications over a decade ago. RingCentral is now uniquely positioned to meet these demands with our enterprise-proven, global, and trusted unified Message Video Phone, or MVP, platform. The results speak for themselves. We delivered a strong second quarter, as we continue to benefit from strong contributions from mid-market, enterprise, and our channel partners. Let me highlight some recent key events: First, we announced an expansion of our strategic partnership with Atos. Second, together with Avaya, we announced a further global rollout of Avaya Cloud Office by RingCentral. Third, we saw good uptake on our new RCV offering, which we launched in early April. We’ll talk more about this later. And lastly, we were humbled to learn last quarter that RingCentral has been named to the Forbes Global 2000 list, putting us alongside the biggest and most valuable companies in the world. As to our financial performance, revenue and non-GAAP EPS exceeded our guidance. Key drivers continue to be mid-market, enterprise, and channel. We delivered a record number of seven-figure TCV wins this quarter. Several of these large wins were in our targeted verticals of healthcare, financial services, and education, and also included multiple international wins. Key metrics for Q2 were solid across the board. Total revenue grew to $278 million. This is a 29% increase year-over-year and is above the high end of our guidance range. Importantly, total annual recurring revenue, or ARR, grew 33% year-over-year to $1.1 billion. The difference between overall revenue growth and higher ARR growth is driven by higher adoption of RingCentral apps relative to the sale of new desktop devices. We believe the strong Q2 results further validate RingCentral as the industry-leading platform in the global UCaaS market. We look forward to building on this momentum and expanding our market reach to maximize the opportunity ahead. On that note, we recently announced that RingCentral will be the exclusive UCaaS provider to Atos Unify. Unify, formerly Siemens Enterprise Communications, was acquired by Atos in 2016. Approximately 60% of their on-premise installed base of 40 million users is in Europe, with a strong presence in Germany. This opportunity is in addition to our system integrator relationship announced earlier as part of the Atos Digital Workplace portfolio. Importantly, during the last few months, Atos and RingCentral saw a pent-up demand to address Unify’s install base together. Atos has accelerated its reseller outreach efforts and now has more than 90 channel partners trained to sell the new Unify Office by RingCentral, or UO. We expect to be live with UO in 11 countries by the end of the year. These include Germany, France, Spain, Italy, Netherlands, Austria, Belgium, Ireland, the U.S., the UK, and Australia. We are also excited to welcome Atos as a direct customer to the Unify Office solution. Atos will start with deploying UO to the 5,000-strong employee base of its Atos UCC division, formerly Unify. Atos will later expand UO to their entire base of over 100,000 employees. As to Avaya, based on joint channel enablement efforts and first joint customer wins with Avaya Cloud Office, or ACO, we are quite pleased with the early progress of this partnership. There are now over 2,000 channel partners onboarded. There is a robust pipeline building, and several important large deals already on the books. An example of a large joint win was the selection of our platform by a large BPO that supports the UK Government’s COVID-19 Tracing Programme to control the spread of the virus. In this highly urgent and critical use case, the solution leveraged RingCentral’s open API platform and was rolled out to multiple thousands of users in approximately six weeks. In June, ACO was launched in Australia, Canada, and the UK. Several new features and additional migration tools were also released in June, which will make cloud migration even more seamless moving forward for large customers. Of course, our success with these great partnerships is rooted in our leading, comprehensive Message Video Phone, or MVP, platform. It is only by enabling their employees to communicate via any mode, from any device, and from anywhere that businesses can stay productive during these trying times. To that end, we saw double-digit growth in messaging and triple-digit growth in video and mobile voice minutes on our MVP platform quarter over quarter. Speaking of video, our new open, standards-based RingCentral Video, or RCV platform has been quickly evolving since its launch in the beginning of April. Feedback and customer reception has been very positive, and we already have over 10,000 paid RingCentral Office accounts enabled with RingCentral Video. Building on the successful launch of RingCentral Video, in June, we announced the initial release of RingCentral Rooms. This extends the power of RingCentral Video to conference rooms and meeting spaces, which remain important even in these trying times. Overall, we are proud to be able to assist in the fight against the global pandemic. Our mobile-first enterprise communications platform, combined with our open integration APIs, has enabled major institutions like the State of West Virginia to rapidly deploy our solutions with embedded communications capabilities for thousands of contact tracers to reduce the impact of the pandemic. In summary, RingCentral has always been committed to enabling workforces to productively communicate and collaborate via any mode, on any device, from anywhere. And, with the new world order, working from anywhere is no longer a nice to have. It is now a hard necessity. RingCentral is now becoming a platform for business continuity. With our well-proven MVP global solution and our rapidly evolving strategic partners and reseller ecosystem, we are confident that the cloud will continue to win, and RingCentral will continue to win in the cloud. Now, I will turn the call over to our President and Chief Operating Officer, Anand Eswaran.

Thank you, Vlad. Good afternoon everyone. Operationally, Q2 was a very strong quarter. We are laying the foundation for the next phase of sustainable multi-year growth. The business is thriving and the demand for our cloud-based business communications solutions is higher than ever. Our open, integrated MVP platform enabled us to add more new customers in Q2 than any other quarter in our history. Interestingly, this was accomplished without requiring much physical travel for our sales and professional services organizations. There was broad strength across a number of important segments and initiatives. In the enterprise segment, we saw a record number of seven-figure TCV wins. We also had a very strong quarter for our contact center portfolio, which was included in approximately half of our seven-figure wins. Our channel plays a strong role in our success. Channel ARR increased 60% year-over-year to $375 million. As we continue to grow to become a multi-billion-dollar revenue company, we are expanding our strong foundational focus on the four Ps: products, people, processes, and partners. These efforts will enable us to serve our customers’ needs even better, especially in targeted vertical markets. Let me share some more detail. First, in the products area, innovation was and remains our first principle. We launched RingCentral Video, RingCentral Rooms, and together with Avaya, we launched Avaya Cloud Office by RingCentral with subsequent international expansion. I would also like to highlight that this velocity of innovation happened with most of our development teams working remotely. Second, on the people front we have continued to expand our management team, attracting top talent, including incredible industry leaders like Chief Revenue Officer, Phil Sorgen, and our Chief People Officer, Gunjan Aggarwal, who we announced recently. Attracting and retaining a strong and diverse pool of talent is vital to our long-term success, and it is a priority for our management team. On that note, hearty congratulations to Vlad for recently being named among the top two CEOs for Diversity, and amongst the Best CEOs for Women in the annual Comparably survey covering 60,000 organizations. Regarding business processes, we are making great progress to automate and digitize our end-to-end process and operations, as a foundation for scale. This will enable us to apply AI and Machine Learning to better predict customer needs and deliver enhanced and proactive value to our customers. Now let’s talk partners. First, Vlad shared details on the strategic partner front with Avaya and Atos, which helps us to further scale our global reach and capture the massive opportunity ahead. Second, we continue to see strong performance from our service provider partnerships, led by our renewed momentum with AT&T. And finally, we also continue to invest in our channel partner ecosystem. During the quarter we launched IGNITE! a new Partner Program. This program enables partners to own the entire sales cycle with their customers. Overall, our partners contributed to over 70% of our seven-figure wins in the quarter. Let me bring them to life with a few great customer examples. One example of a marquee channel win in Q2 is Marvell Technology, a leading global semiconductor company. Marvell needed a highly reliable, scalable, and a global communications platform to replace their legacy on-premise systems. Our mobile-first platform, our global coverage, and integrations with other enterprise solutions were important differentiators in securing this 6,500-plus user win spread across 20-plus countries, including India and China. Another notable channel win was with one of the largest custom print apparel companies. They needed a tightly integrated cloud-based communications and contact center solution. This is an 800-plus user UCaaS win combined with over 250 RingCentral Contact Center seats. As we expand our go-to-market motions, we are finding compelling new opportunities across several important verticals. In healthcare, we had a seven-figure upsell win at a leading U.S. provider of behavioral healthcare services. This important customer is using our unified communications platform to better operationalize their business across the country. In Q2, they expanded by 50% to 7,500 users as they continue to roll out RingCentral across their increasingly distributed workforce. In education, a large globally renowned U.S. university extended their use of RingCentral Office with an additional 1,500 users added during Q2. This is a great example of the opportunities emerging due to COVID, where we saw an accelerated deployment cycle at this university with tens of thousands of potential users still ahead of us. There is higher usage of our RingCentral apps versus desktop phones, which is a positive indicator of better user engagement. In addition, the implementation has been accelerated to ensure seamless continuity for the upcoming school year. In financial services, we secured a 2,500 user win across 15 countries with a large private equity firm. For this customer, our rich platform capabilities, service quality, security, and global reach were key competitive differentiators. Finally, last year, we highlighted an Engage Digital win with a large air transportation company. Over the past year, we have demonstrated the value of our RingCentral platform in helping to transform the Company. This transformation became more urgent in the face of COVID-19 with the workforce moving to work from home. In Q2, we saw a trifecta; first, the customer extended to our UCaaS solution, with 2,400 RingCentral Office users. Then, the total expanded their CCaaS footprint by 60 agents. And finally, they consolidated all their digital point solutions to the RingCentral platform. It is great to see customers increasingly embracing the value of the full RingCentral portfolio. Today, the cloud transformation of communications is a top priority for every business to meet their enterprise needs at a global scale. With our enhanced focus on products, people, processes, and partners, we are in a strong position to be a core part of our customers' digital transformations and address the large opportunity ahead of us. I have been with RingCentral for a little over six months now. I am humbled by our vision, the Company’s commitment to innovation, and our incredible people-centric culture. I am excited to be part of the next phase of RingCentral’s growth journey. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv. Thank you.

Thanks Anand and good afternoon everyone. Q2 was a solid quarter on multiple fronts. First, ARR for our flagship UCaaS solution RingCentral Office surpassed $1 billion for the first time, and grew 36% year-over-year. Second, our overall subscription revenue grew 32% year-over-year along with an overall operating margin of over 10%, demonstrating solid, profitable growth. This is a testament to the large market opportunity and our consistent execution. Third, we are winning larger enterprise customers, with a record number of seven-figure TCV deals, demonstrating how strong the demand is for our product in the COVID environment. Fourth, ACO is off to a good start, boding well for the long-term opportunity. And finally, we announced UCaaS exclusivity with Atos Unify, further expanding our global reach, and complementing our existing partnerships. Businesses are turning to RingCentral as they transition workforces to a work-from-anywhere environment. Mid-market and enterprise customers defined as $25,000 or more in ARR had another strong quarter with ARR up 50%. Underpinning this strength was bookings growth from new enterprise customers with $100K or more in ARR, which was up over 50% sequentially. As relates to our existing customer base, we mentioned in May that small businesses in verticals like retail, travel, and hospitality that account for less than 10% of our overall installed base saw higher churn. But as the quarter progressed, the churn rates improved consistently, although still not at historical levels. With overall Q2 on solid footing, let’s move on to our 2020 outlook. We are encouraged with the recent trends, but in this crisis environment, we continue to make prudent assumptions for the remainder of the year. Given Q2's outperformance and our highly predictable recurring revenue model, we are raising our annual guidance. We feel confident in executing our plan. Now, onto specifics. We expect subscription revenue growth of 28%, up from 25% to 26% previously. We expect other non-recurring revenue growth of 8% to 12%, reflecting customer engagement shift from desktop phones to RingCentral apps on laptop and mobile devices. We expect total revenue growth of 26% to 27%, up from 24% to 25% previously. We expect non-GAAP EPS to be between $0.92 and $0.94, up from $0.91 to $0.94 previously. This includes a $0.01 impact from lower interest income. In summary, the global pandemic has provided a structural catalyst for UCaaS adoption and RingCentral saw stronger demand than ever. Even when COVID is behind us, which we hope happens as quickly as possible, we expect that the new normal for enterprise communications will be cloud-first, as on-premise systems have shown to be inadequate for the needs of businesses. We believe that the market inflection is past the point of no return, and RingCentral is strongly positioned to take advantage of this trend. We have an industry-leading product, a steadfast commitment to innovation velocity, as well as a global and diversified go-to-market reach. Our momentum with AT&T, progress with Avaya, and expansion with Atos further enables us to scale our market reach and add incremental layers of long-term profitable growth. With that backdrop, we are confident in our ability to lead in this $50 billion-plus UCaaS market. Of course, this would not be possible without our amazing employees, committed partners, and loyal customers. So, a huge thank you to all of them. With that, let me turn the call to the operator for Q&A.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. Our first question comes from Brian Peterson with Raymond James. Please state your question.

Thanks gentlemen, and congrats on a really strong quarter. So Mitesh, maybe I'll start with you. Given the large revenue being impact, we're kind of used to seeing that. But we actually saw a big return off of that bottom line as well. So maybe help us understand how you're thinking about the gross cash margin balance going forward as you guys head into 2020 and beyond?

Yes. Thank you, Brian. Yes, the quarter did progress. As you saw, we did beat the quarter pretty handily. The quarter did progress better than expected initially throughout the quarter. A lot of the dominoes did fall our way there. So, yes, you're right. So we did see the subscription revenue by about $11 million. And then a $5 million of that fell to the bottom line. So close to a 50% margin flow-through from the revenue is really again, speaks to the unit economics, and the inherent leverage we have in the business model where you can tweak this 50% incremental revenue margin as a proxy for our installed base recurring margin, so really strong unit economics there. And the flavor, Brian, is going to be very, very similar to the way we have been executing, which is that we will possibly deploy this upside towards innovation and go-to-market for growth. But meanwhile, we will stay very disciplined for the focus on profitable growth as we have been and promised expansion of 40 to 50 basis points of margin expansion for you.

Understood. Thanks Mitesh, and maybe a follow-up for Vlad. I know you gave some perspective on RingCentral Video, but I guess a few quarters in with RCV. I'm curious how you engage your partners so far?

Yes, Brian. So, to be clear, we're one quarter in with RCV. It's still early. Progress has been quite robust. We’re actually seeing a good number of accounts on RCV now. It's around 10,000 bank accounts at this point. And most new customers are now using RCV. As we stated, when we first launched the product, we expand the overall customer base to migrate from RingCentral Meetings, which is powered by another provider to migrate to RCV over time, so that's still the plan. And we are working very hard on making this decision very positive and an easy decision as the product matures. But so far, so good is performing well.

Thank you. Our next question comes from Bhavan Suri with William Blair. Please state your question.

I have two questions, maybe first for Mitesh. Mitesh, you've done a lot of puts and takes here. You've got really star growth over 100,000. You’ve got churn improving. Just as can you highlight the puts and takes of the quarter that drove the outperformance? I’d love to understand sort of the puts and takes through the quarter? And I’ve got a quick follow-up.

Sure, Bhavan. I have a few points to share. Firstly, we observed a strong trend in acquiring new logos. In the enterprise segment, we experienced a 50% growth sequentially, which indicates robust performance. Notably, 70% of our total contract value for deals worth 1 million came from new logos. Secondly, deal sizes are increasing, and thirdly, customers are leaning towards longer-term commitments. On the go-to-market front, our channel partners have shown considerable strength, achieving a 60% growth in annual recurring revenue. Overall, customers are increasingly willing to commit long-term to UCaaS in this environment. Moreover, the impacts of COVID-19 have turned out to be beneficial for us at RingCentral. Initially, there were concerns about potential panic buying in the first quarter, but that has not been the case. Lastly, we are witnessing a noteworthy influx of high-value customers with significant potential for growth and expansion.

And at some point, it’d be great to revisit the LTV to CAC at the high end of the enterprise? But my second question is for maybe all of you, Anand, Vlad, et cetera. Microsoft already announced Friday or maybe late last week that they're suspending some of their core features around, carriers around distributing calls by managing that. They don't want to be a carrier in the study in definitely. Obviously, you also announced integration with Teams. And so I view it as a massive positive, but honestly, I'm not sure you all think about what Microsoft announced and the Microsoft partnership from a long-term perspective, I don't care near term. But if you view they're stepping back from sort of competing with carriers and the division of RingCentral the team. Vlad, Anand, how do you guys think about what that means for RingCentral over the next 3 or 5 months?

Vlad go ahead.

At a high level, we believe that Microsoft will be a long-term strategic partner for us. We feel that we are combining complementary strengths to transition our customers’ communications from on-premises to the cloud. We have a strong presence in the system side of this equation, and we still offer the Message Video Phone system.

We saw really good strength there, right. That kind of really pushed there, right, to be clear?

Well, no. But I'm saying outside from RingCentral, right? And Microsoft again, you need to talk to them directly on what their strategy and goals are. But from what we can tell with a very, very strong auto messaging still and less so with the strong in particular. So, at a high level, it seems it's a positive for us, for positive, for the customer as well. But how the market exactly will take it, means we’ll have to see. Anand, you have anything to add to this?

No, you’ve covered it all, Vlad. For us, it's straightforward. The specifics are best discussed with Microsoft, but we are continuing our partnership with them. The recording was impressive, providing their teams' customers access to the best phone system available. Additionally, we are increasing our investment and expanding the range of enterprise features for what is already one of our video systems. Overall, we feel optimistic about this.

Our next question comes from Nikolay Beliov with Bank of America Merrill Lynch. Please state your question.

My first question is for Mitesh. Congress on the results here, Q2 results came in line with our forecast and also a few words pointed around the Microsoft pipeline. And Mitesh, I noticed that the guide for 3Q and the rest of the year was maybe a little bit more conservative than 2Q. Just wondering, if you can walk us through what you're seeing, what trends you're seeing in the pipeline or churn or new business that cause this year to be a little bit more conservative in the last quarter?

Sure, let's start from the beginning. The main assumption is that the macroeconomic environment does not improve significantly beyond what we saw in the second quarter, and that the lockdown conditions persist. If we look at the guidance you've mentioned, there are a couple of key points to note. We have assumed that the productivity of our sales team does not increase. In fact, during Q2, we observed a contrary trend with growth in our pipeline and an improved conversion rate. However, we are taking a cautious approach with lower expected close rates on our pipeline. Additionally, regarding churn and net retention, we have made more conservative assumptions for the second half of the year compared to what we experienced at the end of Q2. While we hope for better outcomes if conditions improve, we are currently proceeding under these assumptions. We feel confident in our guidance and our execution strategy.

And the follow-up for Vlad and Anand, can you guys help us contrast and compare the quality of the install base of Atos versus Avaya? And secondly, the cost to book in your business versus comparing Atos to Avaya and the rest in general business?

Let me address the first part of your question. When it comes to the quality, it's difficult to define since users are users. However, Atos has a greater number of customers that engage directly, rather than through a channel. This might suggest a potentially easier, though perhaps slightly quicker, route to reaching those customers. It's also important to note that Atos's customer base is primarily located in Europe, especially in Germany. Meanwhile, Avaya operates more internationally, with a significant focus on the U.S. When we assessed this opportunity and chose to take the additional steps we've announced, we found it to be largely complementary to Avaya's existing base. The overarching goal remains to transition current on-premise users to the cloud while maintaining their traditional brand loyalty. We don't observe many customers utilizing both Avaya and Atos simultaneously, which reinforces the complementary nature of the two. Anand and Mitesh may have additional numbers to share.

I will take that.

Yes, okay.

Yes, I believe that's the essential point. When we consider all these distribution channels for our partnerships, our initial costs are lower because we don't require significant upfront spending on sales and marketing. Moreover, the other aspect is that the lifetime value is higher since our partners are motivated to retain customers. We're experiencing not only reduced booking costs but also increased lifetime value. So, it's a dual benefit approach.

Thank you. Our next question comes from Sterling Auty with JP Morgan. Please state your question.

Yes, thanks. Hi, guys. So wondering you mentioned our success and you're happy with a performance for Avaya. But typically, just wanted to check in on where you are on the ramp of things like the tools to help deceleration deployment migrations over RingCentral whether all of the channel training are complete. In other words, are you fully brand story, there's still a couple more milestones that we should be looking for even bigger contributions from larger partnerships?

In Q2, we made significant advancements with our migration efforts, having started them before finalizing our partnership with Avaya. We improved automation in our migration scripts, and I believe we have fully implemented them in collaboration with Avaya, which gives us confidence. From a product perspective, it's an ongoing process. We launched ACU sort 2.0 internationally in the UK, Canada, and Australia, and we plan to roll it out more extensively across Europe in the second half of the year.

Got it. And one follow-up Mitesh maybe for you. Looking at the go-to-market motions that you have now, how much savings have you gotten on travel, etc., from COVID-19? How much of that maybe will you be able to hold on to permanently post-COVID given the success you're seeing in the setup in the go-to-market motion you have now?

Yes. No, I think it's hard to exactly quantify for you although we have the exact numbers, but we do have a lot of discretionary spend, not just travel but events, customer events, employee events. All of those are getting repurposed for R&D and go-to-market. Of course COVID, yes, I mean, this is going to be a wakeup call for all companies to make sure we look at all discretionary spend, and tighten the belt. So, a fair amount of discipline is going to go on. And I think, we'll see some more leverage going forward.

Our next question comes from Terry Tillman with Truis Securities. Please state your question.

I guess maybe the first question is. As you're further into the opportunity with Avaya, what have been some of the early learnings? And how do you see this opportunity playing out as it relates to actually driving ARR this year or next year compared to just months ago? And then I have a follow-up.

Yes. I'll take the first part, and I'll let Mitesh answer the second part of it. So the first part, early progress we've made. We've onboarded 2000 plus partners. The price is very healthy and as little as a quarter, we have several large deals in Q2 which feels good, and it's broad. We had wins in retail, higher-end manufacturing, the BPO space. So it sort of broad vertical landscape. So, all the fundamentals are good as the year expected and it continues to be for the second half as well. Mitesh, I'll let you add to the second half on the financials.

Yes, now the CFO is trying for temporary expectations. Thank you, Anand for doing a marvelous job there and setting great expectations. Now, our good things he says, look in terms of the contribution for the quarter, we are a billion-dollar revenue business so it doesn't quite move the needle materially in terms of contributions for this quarter and no change to the expectations we do expect this to start taking hold in Q4 of this year and then continue to in 2021.

And Mitesh, I think in your prepared remarks, I like this phrase layers of growth. So whether it is Avaya, Atos, AT&T, Microsoft Teams integration, ENGAGE, I'm sure I'm forgetting about 5 or 10 of them. But investors ask lots of questions because they're curious about these opportunities. How do we frame this as it relates to maybe the growth profiles as we move into next year? And do some stand out more than others? Just a little bit of help on all these catalysts kind of confluence of all those catalysts?

Yes, no, I’d say it’s a very. So, we do have multiple catalysts going on, but if I can summarize these catalysts in let’s say two buckets. Bucket number one is expansion of money. And bucket number two is, call it strategic partnerships. Both are starting to ramp in this year. So if you look at the move of markets, if you look at the bookings for mid-market and enterprise, over 60% of our office booking came from that segment. We also announced a 100,000-seat win from Atos. I will tell you that we have more deals of the size in the pipeline. By signing up these large deals is unpredictable, but customers are evaluating RingCentral for work-from-anywhere environments. I will tell you that. So, that's bucket number one which is expansion, more expansion up market. And secondary is, let's lump these two together in two partnership. Avaya, AT&T, Atos, I mean the play there is expanding our reach to a broad PBX installed base. That's one, international diversification in the second one. And Nikolay asked about the cost of acquisition. It does lower our cost of acquisition. So I think these are the two big long-term layers of growth. And the way we're thinking about this business is an organic distribution strategy for us. So going forward, we will give you color on each and every partnership, but it's going to be hard for me to break out individual pieces the way I did for ACO this time.

Our next question comes from George Sutton with Craig-Hallum. Please state your question.

I wanted to focus a little bit more on the international expansion opportunity, as you're obviously working with a growing list of both strategic and channel partners around the world. Can you give us a sense of kind of where you are? And what you see is the duration of growth opportunity? How are you planning to expand outside of the U.S. either through these partners or through your own traditional organic growth means? I think that would be helpful to understand.

It's a great question. I'll take that. So the first vector is our strategic partnership. That's where Atos Unify makes a big difference and expanding our reach internationally. And we already see joined pipe building up in Europe, which traditionally has not been a hard place that we play in. But we also have a direct sales presence in UK and France and Australia, and we continue to do well there as well. But the primary vector of growth right now will come from the partnerships.

I'm curious, clearly on the distribution side with the Atos and AT&T's and Avayas of the world, you have a distribution advantage. I think what we get challenged by clients on a lot is trying to explain the advances you have from a product perspective. And for years, Vlad’s talked about outinvesting everyone. Wondering, if you could, in a world where everyone has a platform of integrated capabilities, how are you trying to define your unique competitive advantages on the product delivery side?

Vlad, you want to take in. So while Vlad is getting on. So, this is how I would put it. We look at this broadly for us. First, it is the different modes of Message Video Phone, the old platform coming together. For this mission-critical and the level of enterprise feature depth we are adding on the phone system is best-in-class. The second as I look at it, is elements like the work we are doing on security, and on user experience of unified applications is a major product differentiator for us. The third thing, I'd call out is just trust the fact that we have been on 5 nines from a reliability and security standpoint, for a few quarters now. Again, it makes a massive difference. And the fourth thing, I would call out is just the international footprint. The geographic footprint we have of a where global offices available and works natively is, again, there’s a huge and wide moat around it. So, all of these come together to make the product clearly differentiated. But on top of that, what also works is our ability to work with our partners to quickly create joint products, to quickly make sure that they can meet their security requirements, which are very stringent as well. So, those things then finally come together as the icing on the cake to make these partnerships, these distribution models work better than most.

Yes, let me elaborate on that. Firstly, we believe we have a unique platform. If you recall, I've mentioned that the only other provider with a similar comprehensive vision is Microsoft. However, with their recent announcements, it appears they may be shifting their focus away from the voice aspect. Regardless, our approach remains distinct across these modalities. We excel particularly in the phone system area, which continues to strengthen for us. Our successes with AT&T, Avaya, and Atos are evidence of that. It’s important not to underestimate our digital initiatives; while we’re still working on leading in that area, we are making significant strides to close any gaps and aim to produce a world-class product. Our messaging capabilities are also quite good, and overall, we are far from being seen as a commodity. Should we ever reach that stage, we have already established ourselves with a distinct advantage. Historically, our biggest challenge has been access. In direct comparisons, we win far more often than we lose. We tend to lose only when we're not present in negotiations. Partnerships with AT&T, Avaya, and Atos will help make it harder for competitors to succeed, and that’s what we are counting on. Overall, we feel optimistic, as these partnerships are becoming more streamlined and integrated, providing enhanced support and innovation opportunities, especially with partners like Avaya. There's a lot happening, and we are excited about our strategic direction.

Our next question comes from Michael Turrin with Wells Fargo. Please state your question.

Mitesh, you’re again, I mean, you've referenced it multiple times showing strength across multiple key metrics, even ARR growth and SMB, looks like it picked up a little steam here. Can you maybe talk through some of the key factors driving that uptick? Is that one surprised us a bit more than some of the others here?

Yes, no, I think it's a good observation, Michael. Yes. We did see trends in SMB as well this time, especially in new logos. A couple of things are happening under the hood. If I were to pick it click below for you. Our brand is resonating. We’re seeing strong evidence of e-commerce. And actually what's happening is we are spending less money in acquiring these new logos in marketing. So I think the combination of these two or three trends is actually helping our CAC being lower and, of course, LTV. But going forward, I think the right boggy to target is about 15-ish percent in the overall SMB space, but near-term trends to indicate that we are seeing some steam in self-serve and e-commerce.

Our next question comes from Samad Samana with Jefferies. Please state your question.

Hi, thank you for taking my question. I wanted to follow up on the Atos partnership. You initially announced this partnership at the beginning of 2020, and now it's expanding significantly. I'm curious about what key factors in the past six months led to the extension of this partnership. Additionally, Mitesh, regarding the $100,000-plus seat deals that are in the pipeline, are these related to the partnerships you’ve ramped up, or were they already in the pipeline before the ramp-up of ACO and Atos? Thank you for addressing my question.

Yes. The first few months of the partnership, the traction with the joint sales forces was resonating hugely. And then COVID happened and so immediately, they saw the difference this could mean by selling at the across unified base as well. So, both of those traction off the portfolio and to get enterprise customers and then COVID that came together. This extension only makes sense and that's how this happened. Mitesh, I'll transition the rest to you.

Yes. The second part is that the scale budget scale, correct. And yes, it's a mixed actually. We have some in the pipe. We're getting more with these partnerships. So, I think it's starting to spin up a virtuous circle for us here.

Our question comes from Will Power with Robert W. Baird. Please state your question?

Yes, I just want to come back to some of the earlier comments on contact center, that being a key part of roughly 6% of your larger deals. I just wonder, generally, if you could kind of characterize the demand you're seeing there and maybe just talk a little bit about the roadmap going forward to make sure your position for that demand. Obviously, you've done a lot organically on the digital side, but do you need to do more and bring more of the capabilities in house as opposed to partnering with in contact with others over time?

Yes, I don't want to say it's a good question. I mean our partnership within contact remains as strong as it has ever been. And obviously, we are investing in integrating Engage Voice and Engage Digital strongly, RCO platforms. So the product efforts have on as we have already shared with you guys. But as you look at the sales side, simple things like, last year, we had Arch Capital and the UCaaS win there. So now, we are basically seeing them, not just deploy UCaaS on an accelerated basis, but they’re also picking up on needing deploy a strong CCaaS solution. So that's where our inContact partnership makes because the integration, the voice quality of the RCO platform, the routing capabilities, all of it comes together where Arch Capital extended the UCaaS footprint to CCaaS. That's why you saw about a large percentage of our large deals, also then become contacts center deals and that's a key thing. Going forward, I think companies are looking at CCaaS and UCaaS decisions, and we feel good we are well poised.

Our next question comes from Meta Marshall with Morgan Stanley. Please state your question.

Maybe it’s just a question on how you’ve noted that conditions have improved throughout the quarter, but I would guess that some of your customers are still a little stressed. So are you accommodating them with payment pauses or reducing seat counts? Or has it caused any change to forward contract structures? Thanks.

Hi, Meta. We are accommodating our customers in a couple of ways. First, we have noticed a trend where customers are seeking payment deferrals. We observed an increase in these requests in April, which then decreased in May and June. We are managing these requests and have set aside enough reserves in our books to cover the potential risks. The second trend is somewhat surprising. Although we might expect that customers would not be willing to pay upfront for annual prepayments, we are actually seeing them signing longer-term contracts. This could negatively impact the long-term structural growth of our UCaaS. So, those are the two trends we are observing, and that reflects in our guidance.

Our next question comes from Kash Rangan with Bank of America Merrill Lynch. Please state your question.

I'm wondering, if you guys have a perspective. How in the long term, the lifetime value of a customer or subscriber will change as you have video? How does it change retention ARPU, uptick, et cetera? Just high-level thoughts there because certainly agree that you have a very unique proposition, which is unlike Zoom and Slack in the marketplace. But how does this play on the business model super long term? Thank you so much.

Yes, let me take that Kash, and thanks for the surprise cameo effect there. So if you look at the way, unit economics, right. So, it's driven by two things in my mind. One is churn and second is upsell and net retention. Once you look, if you layer on, you said two things. One is video and the product and second is partnerships. So let's take video first or the product itself. Given that we're expanding the platform with MVP, it does put in more barriers to exit and make our base stickier, which would be an inhibitor of churn, so reduce churn, which tends to tell the lifetime value. So that's part one. Part two with the partnership, again, lower cost of acquisition to get these customers. And again, because these partners are incentivized to keep hanging on to their customers, that means less churn and more upsells and retention, so higher lifetime value. If you package it all together, long-term, our sustainable economic margins are going to be trending up higher than we currently have, because of these two long-term trends.

Our next question comes from Rich Valera with Needham & Company. Please state your question.

Questions on AT&T, sounds like momentum continues to build there, but last couple quarters you given fairly specific quarter-over-quarter gains that you were seeing there. Wondering if there's any color you can add on how AT&T bookings trended quarter-over-quarter? And if there's anything you're willing to say about AT&T perhaps transitioning from a headwind, which I believe you said they were in 2019, and when they might become neutral, or a tailwind to your overall growth rate? Thank you.

Thanks, Rich. I'll take that. In Wall Street, if you provide a metric once, you need to be ready to give it consistently. So, yes, we did observe strong bookings in AT&T this quarter, along with an increase in seller participation. The trends we saw last quarter continued. We're also gaining traction in the upmarket segment. Initially, we aimed for small and medium businesses, but we're now seeing opportunities there. Regarding overall guidance, you mentioned it, Rich; the growth overall is affected by the install base still churning, and our bookings are not fully offsetting that. For this year, AT&T is turning out to be less of a headwind, and I believe it will start to improve in 2021.

Thank you. Ladies and gentlemen, that concludes today's conference. All parties may disconnect. Have a great day.