RingCentral, Inc. Q3 FY2021 Earnings Call

Good day, and welcome to RingCentral's Third Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Goodman, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to RingCentral's Third Quarter 2021 Earnings Conference Call. I'm 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. Accompanying today's presentation are slides being shared via webcast. The link is available at our Investor Relations website at ir.ringcentral.com. For those listening via telephone dial-in, I would encourage you to also join the webcast and select the listen by phone option. Some of our discussions and responses to your questions will contain forward-looking statements including our fourth quarter and full year 2021 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, we continue to be impacted by the COVID-19 pandemic and its effects on our business will depend on the severity, duration and extent of the pandemic and actions taken by governments, businesses and consumers in response to the pandemic, 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. Please visit our Investor Relations website 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, I'll turn the call over to Vlad Shmunis.

Good afternoon, and thank you for joining our third quarter earnings conference call. I'd like to start by thanking Mitesh for his valuable contributions to our company over the past decade as RingCentral grew from a little over $50 million to now over $1.6 billion run rate. Since stepping in as the CFO nearly five years ago, Mitesh has been instrumental in driving consistent profitable growth and outsized shareholder results. We will certainly miss seeing and working with Mitesh on a day-to-day basis. But he has left his mark on his term with a very strong foundation and an exceptional finance team that I'm confident will carry the torch forward. We wish Mitesh all the best in all of his future endeavors. With that, on to Q3 results. Third quarter results were outstanding. First, subscription revenue increased 38% year-over-year to $385 million. This is an acceleration of five points year-over-year. Second, RingCentral total ARR increased 39% year-over-year to $1.6 billion. This is an acceleration of five points year-over-year off a base of over $1 billion. And third, leading our ARR growth is enterprise ARR, which includes customers generating $100,000 or more in ARR, and this is our fastest-growing segment. Here, we grew 53% year-over-year to $653 million. This is an acceleration in growth of eight points year-over-year and demonstrates our strong growing traction with large-scale customers. These strong results speak to our continued success in capturing the $100 billion-plus market opportunity of on-premise PBX users migrating to the cloud. This massive opportunity does not include the near adjacencies of cloud contact center, another successful RingCentral solution, which adds an additional tens of billions of dollars in total addressable market. To date, industry research estimates cloud penetration is still at less than 10%. This means there are hundreds of millions of employees at the cusp of a generational transformation to the cloud. RingCentral is at the forefront of this wave of digital transformation and is a well-established leader in this market. And this is further evidenced by our strong, consistent execution and financial performance. On that note, we are proud to once again be recognized as a leader in the latest Gartner Magic Quadrant for Unified Communications as a Service, Worldwide Report for the seventh year in a row. In the report, RingCentral was positioned high for completeness of vision in the Leaders' quadrant. In addition, RingCentral ranked number one in three out of four Gartner critical capabilities for Unified Communications as a Service. These use cases include large enterprise, midsize, and small to midsize businesses with integrated contact center. This builds on our success with IDC, Frost & Sullivan and other industry analysts this year. So why does RingCentral win? It's about trust, innovation and partnerships or what we like to call TIP. It all begins with trust. Trust is not just a feature, it's a commitment. UCaaS is a lifeblood for both internal and external communications for businesses worldwide. Reliability, security and data privacy are table stakes, especially with larger enterprise customers. RingCentral's track record of delivering five nines uptime for over three years and counting is unparalleled. This equates to around five minutes of downtime a year, including maintenance windows. This is literally one hundred times better than three nines, or close to nine hours of downtime per year that some of our competitors provide. Next, innovation. RingCentral has always been committed to a rapid pace of innovation. Our years of R&D investment in a modern, scalable, cloud-based architecture have enabled us to meet the stringent requirements expected of a leading enterprise communication system. Expanding on this differentiated platform, we continue to enhance our customers' user experience with many new features and capabilities across the platform. This includes mobile heads-up display, call-to-video, Microsoft Teams embedded dialer as well as multiple new RingCentral Rooms capabilities. This high level of innovation is driving favorable trends in customer app engagement. Let's take a closer look at the various modalities. Voice is alive and well, with almost all of our customer accounts continuing to leverage our phone and PBX capabilities. Next, 45% of our customer accounts engage with both messaging and phone. And finally, 42% of our customer accounts engage with both video and phone. Overall, approximately 60% of RingCentral customer accounts are engaged with more than one modality of communication. This deep level of customer engagement across all modalities is a reflection of the innovation and investments we have made in the RingCentral MVP platform. This rapid pace of innovation is also driving strong adoption for RingCentral Video. We have now upgraded over 70% of our accounts to RingCentral Video and ongoing migrations are proceeding strong. We are also finding ways to leverage platform innovation to open up new opportunities with our partners, the third pillar of our TIP strategy. One such example is the new service provider platform we developed named RingCentral RISE. This platform will streamline the process for new carrier partners to work with RingCentral. Anand will provide additional color on this later. As for the strategic partners, which includes Avaya, Atos and Alcatel-Lucent Enterprise, we are pleased to see strong incremental contribution and multiple $1 million-plus TCV wins during the quarter. And on that note, I'm very excited to announce our newest strategic partner, Mitel. Mitel is a global market leader in business communications, with over 35 million users worldwide. Mitel has an extensive network of thousands of channel partners servicing customers across the globe, who are largely incremental to our existing channels. Earlier today, we announced that RingCentral is now the exclusive UCaaS partner for Mitel. A differentiated digital transformation path will be provided to Mitel's installed base of over 35 million users. This will be based on the newly acquired CloudLink technology. The key differentiated feature of this new partnership is that Mitel's users will be able to utilize RingCentral's cloud-based video and team messaging capabilities alongside Mitel's on-premise technology. This will be provided via RingCentral's unified MVP app and administrative portal. Mitel's on-premise PBX users will then be able to migrate to RingCentral's full cloud PBX at their own pace, which is a path that is unique in the industry. Also, we have clear feedback from the field that given our well-established industry leadership position, customers now tend to see RingCentral as the primary cloud communications brand. As such, RingCentral will be the go-forward brand for all cloud technologies for Mitel customers. In summary, this new strategic partnership brings together two well-established leaders in on-premise and cloud communications, respectively, utilizing cloud-based technology and an innovative cloud migration path that will be provided to Mitel's customer base of over 35 million users, commencing in the second half of 2022. Please note that CloudLink is not restricted to the Mitel installed base, but may also offer the possibility of extending a similar flexible migration path to other on-premise vendors at a later point in time. In conclusion, Q3 was a great quarter for RingCentral. The results speak for themselves. The communications market opportunity is massive and we believe we are in the early stages of a once-in-a-generation global transformation. Our success is rooted in our commitment to building trust with our customers, our relentless pace of innovation and our differentiated ecosystem of strategic partnerships with industry leaders. Based on these principles, we've built a company that we believe is in a position to continue its leadership position for years to come. With that, I'll turn the call over to our President and Chief Operating Officer, Anand Eswaran, for additional color on the quarter and the underlying growth drivers. Thank you.

Thank you, Vlad. Good afternoon, everyone. We had an excellent Q3 across the board. Our growth is accelerating, the pipeline is expanding and the partnerships are ramping. On today's call, I'll focus on four key growth drivers that both contributed to the strong Q3 performance and reinforced our confidence in our ability to continue meeting the cloud communications market. First, partnerships where our strategic and carrier partner contributions are ramping and our channel continues to deliver strong growth. Second, international, with a record number of $1 million-plus TCV wins. Third, upmarket customers where we see strong momentum. And fourth, integrated UCaaS and CCaaS, which is driving new customer wins and upsells. Let me now dive into some details. Let's begin with the strategic partners. In Q3, Avaya Cloud Office by RingCentral delivered solid growth with both new logos and migrations from the installed base. Contributions were particularly strong in our upmarket segment. Together with Avaya, we secured a new 3,500-plus user retail win across 240 store locations that replaced multiple legacy on-premise systems. We also won Medical West Hospital migrating an Avaya on-premise solution to Avaya Cloud Office with 1,400 lines. We also had strong contributions from Atos. An example is a great win with a Global 2000 chemical manufacturer in Europe, who is upgrading approximately 3,500 users to unify office by RingCentral. And as for Alcatel-Lucent Enterprise, our channel enablement and training work is on track, and we expect this partnership to start contributing next year. And last but certainly not the least, I'd like to extend a very warm welcome to Mitel, our newest strategic partner. These strategic partners collectively account for approximately half of the global market opportunity. Our partnership network creates a significant go-to-market moat for RingCentral in terms of both market reach and cloud migration process. This is evident in the accelerating growth we are seeing in our direct and partner ARR. As for global service providers, key partners, including AT&T, BT and Telus, delivered strong contributions. Our partnership with Verizon Business is also off to a great start. We are pleased to share that we already have multiple enterprise wins in our first quarter working together. As Vlad mentioned, leveraging our years of experience with global service providers, we are also excited to have recently launched our RingCentral RISE platform, which stands for resources, innovation, system integration and experiences. RISE provides a differentiated plug-and-play platform for global service providers to offer co-branded UCaaS solutions and accelerate their customers' cloud transformation. Several new partners are already deploying RingCentral RISE, including ECotel and MCM, and we are excited at the incremental opportunities this opens up in the future. Next, our channel partners continue to deliver strong results. Channel ARR increased 50% year-on-year to $626 million. Our channel partners provide an important and effective go-to-market motion in reaching larger customers across multiple verticals. Case in point, channel and partners once again contributed over two-thirds of our $1 million-plus TCV wins. This included a great win with a large U.S. public school district that more than tripled its RingCentral MVP footprint to 16,000 users across approximately 500 locations. Our diverse partner network is enabling us to efficiently scale our market reach to meet the rising global demand. International is already a strong tailwind to growth and at just 12% of total revenue today, remains a large opportunity ahead of us. With key international partners like Atos, Alcatel-Lucent Enterprise, Vodafone and Deutsche Telekom to name a few, we are well positioned to capitalize on this opportunity. We had a major international milestone during the quarter, where we became the first global cloud provider to be granted a unified license by the Indian Department of Telecommunications. Building on this achievement, we had a great win with Allscripts, a global leader in health care IT solutions. This customer more than doubled its RingCentral implementation with a 3,500-user global expansion across India and six other countries. The partner channel and international strength are all contributing to our robust underlying mid-market and enterprise growth. Upmarket win rates are holding steady and with the pipeline at a healthy level, we are in a good position to close the year strong with continuing upmarket momentum. As we continue to expand our upmarket traction, we are seeing higher demand for our integrated UCaaS and CCaaS solution, leveraging our recently expanded partnership with NICE inContact. Integrated CCaaS is a natural upsell for many of our enterprise UCaaS customers. To that end, contact center contributed to over 60% of our $1 million-plus TCV wins. In addition, when we sell an integrated UCaaS and CCaaS solution, we are seeing much higher UCaaS ARR per account versus those with stand-alone UCaaS. These dynamics are resulting in customers standardizing on RingCentral for both UCaaS and CCaaS. In conclusion, Q3 was a great quarter. And as Vlad highlighted, it all comes back to our commitment to trust, innovation and partnerships. These remain core tenets embedded throughout our organization, and we believe are the key drivers for our ongoing success in this $100 billion-plus market opportunity. With that, as I turn the call over to our Chief Financial Officer, Mitesh Dhruv, I want to just pause and thank him for his partnership, friendship and huge impact on RingCentral's journey and success and wish him the best of luck moving forward. Over to you, Mitesh.

Thank you, Anand. Good afternoon, everyone. We had a record Q3. We had the best growth rate in over seven years when RingCentral was seven times smaller. This speaks to the market opportunity, the unique moats we've built as well as our consistent track record of execution. Subscription revenue grew 38% year-over-year, up five points from the prior year. And non-GAAP operating margin was 10.5%, demonstrating the leverage in our model, especially as our partnerships start to scale. This, again, puts us close to the rule of 50 on a subscription revenue run rate of over $1.5 billion and is an important measure of our profitable growth success. The exceptional growth we saw is a function of four underlying drivers: partnerships contribution, international growth, upmarket strength and net retention uptick. First, on partnerships, we are seeing ramping contributions. This is evident in our direct and partner ARR, which grew 37%, up from 34% last quarter and a 12-point acceleration from last year. On that note, I'd like to extend a very warm welcome to Mitel, which will add yet another engine to our future growth. Second, international revenue growth significantly outpaced our overall growth. Nearly one-third of our $1 million-plus TCV deals came from international wins. As new international partners come online, this presents a large incremental untapped opportunity ahead of us. Third, we are seeing continued strength in mid-market and enterprise customers. Customers are demanding platforms that can bring together phone, video, messaging and contact center to meet the needs of an increasing hybrid workforce environment. RingCentral's MVP platform and our tightly-integrated best-of-breed UCaaS and CCaaS are serving as a key differentiator. Our mid-market and enterprise business is now approximately a $1 billion business, making up about 60% of our ARR mix and growing over 50%. Lastly, we continue to see positive dollar net retention trends. We saw strong upsell as well as record low churn. Upsells were driven by increased user counts as well as contact center adoption and our healthy customer base along with strong multimode usage drove record low churn. These underlying drivers have resulted in strong growth, not just for the top line but also in our average revenue per account, which is a key forward indicator for our growth and sales efficiency. Our average revenue per account has been steadily climbing with Q3 achieving a record high. To recap, partnerships are ramping, international demand is opening, upmarket is kicking into high gear and net retention is at a multiyear high. With this backdrop, we are raising our 2021 outlook. We are increasing total revenue growth to 33% to 34%, up from 30% to 31%. We are increasing subscription revenue growth to 35%, up from 31% to 32%. We expect non-GAAP operating margin to be approximately 10.1%, up from 10% to 10.1%. And we are raising our non-GAAP EPS to $1.32, up from $1.28 to $1.30. Given the strong pipeline and higher visibility with our partnerships, we also expect Q4 direct and partner ARR growth to be at or better than our Q3 growth level. In summary, it was a stellar Q3, and we are on pace to close the year out with strong momentum. Before I hand the call to the operator, I want to say that it's been a privilege to be the CFO of RingCentral. RingCentral's track record of trust, innovation and partnerships is exceptional, and I am proud to have contributed. With the company firing on all cylinders, now is the right time for me to take some time off as I consider the next chapter of my life. I want to thank the entire RingCentral family for an extraordinary run. And last but certainly not the least, I'm extremely grateful to all our analysts and investors for your support and recognition. I will surely miss talking to all of you. With that, let's turn the call to the operator for Q&A.

Operator Instructions. And the first question comes from Bhavan Suri with William Blair.

Can you guys hear me okay?

Yes, Bhavan.

Great. Great. Well, congratulations, guys. I mean blockbuster earnings. The partnership number was amazing. The one blemish obviously, Mitesh, you've had a massive impact, and I know Vlad and Anand said it, too. But I'll say it from our side, you had an amazing impact on shareholders and on all of us. You've done a great job, and you will be sorely missed. But do stay in touch my friend. I do want to talk — I just had one major question here, which is the one I think a lot of people have, which is you had obviously a really, really strong direct and partner contribution. I guess you added to that partner with Mitel. How should we — or what do you expect? How should we think about the contribution of Mitel going forward, say, over some period of time? I'll let you define that. But how should we think about that contribution from Mitel? What do you expect? I'd love some color there.

Sure, Bhavan. Thank you for the kind words, first off. And of course, we'll stay in touch. In terms of the direct and partnerships, yes, we had a very strong quarter there. Look, our partner strategy is very unique. It does give us a clear advantage to capture the secular growth for a long, long period of time. And I think this will be really hard for others to replicate. As to Mitel, this partnership is differentiated in many regards. One key facet is that it will be the RingCentral brand going forward. And so what it means is there will be a faster time to market, so we'll begin the sales and channel enablement fairly quickly. But in terms of contributions, I think we'll start to meaningfully layer on contributions in the back half of 2022 following device compatibility. And then we have this very unique CloudLink architecture, which will further unlock demand after that. Now if you take it a click up, right, for all the partnerships, for 2022, you'll have all the three as contributing and you'll have Mitel layering on. And one final thing to note on these partnerships, Bhavan, is that these partnerships are just not a one-and-done. The benefit of these partnerships comes year after year, with a steady drumbeat and really extend the durability and the maturity of the financial model and really increase the terminal value of RingCentral significantly.

The next question comes from Terrell Tillman with Truist Securities.

And congratulations from me as well. And in the spirit of probably trying to embarrass Mitesh, I would say you've come a long way from being a fellow sell-side analyst over a decade ago, we sit at these analyst days together. So the tremendous job you've done, particularly on this consistent financial execution quarter after quarter, all the metrics, the unit economics and really trying to create a narrative that was a good aid for myself and investors. So congrats on everything and good luck going forward. Now with an actual question. It looks like when I'm looking at fourth quarter, particularly the subscription revenue, the guidance, it looks stronger than what typically you provide. And I know you try to be conservative, but maybe you could help us kind of unpack what's the confidence or what are the drivers that's driving that, I think, much stronger than I anticipated subscription revenue guide for Q4? And that's my only question.

Thank you, Terry. Yes. Thank you for the kind words as well. It has been a long journey since I used to be your bag carrier. So we'll try to do that once in a while. But in terms of your actual question, look, there's no change to the guidance philosophy. We still guide with our usual prudence and leave a fair amount of optionality in the guidance and hope to outperform as we always do. So in terms of what's driving the confidence, it's a couple of things. It's higher visibility from two or three things. So the first one is the full impact you see from Q3. It's a recurring revenue business, so the full impact shows up in the fourth quarter. That's point number one. Point number two, the pipeline, the pipe is at a record high. So that also allows us to have a very high visibility. And number three is our earnings is a week later on. So we did get to see a full up to month of October and the momentum thereof. So net-net, we've got multiple growth engines firing with our MVP and UCaaS and CCaaS demand together is pulling forward. And with the increased pipe, it gives us enormous confidence for the Q4 guide.

That sounds great. I'll probably be carrying your bag though, for — to get that correct there.

The next question comes from Brian Peterson with Raymond James.

I'll add to Bhavan and Terry's comments. Mitesh, it's really been a pleasure to work with you, and you're going to be sorely missed on these calls. But you are kind of dropping the mic here with the quarter, the guide and then the Mitel partnership. But I want to start on the other topic. We're just going to get this question tomorrow. And I guess it's more on 2022. I know you guys aren't officially guiding to anything, but we're going to have a new CFO coming in. So is there anything that you've got to share qualitatively about expectations for 2022?

Yes. No, that's a fair one, Brian, and thank you again for the drop-the-mic comment. I really appreciate this. Look, again, as usual, we don't guide for our 2022 until Q4, which is the February call. But you should be rest assured that given the momentum we have with the drivers in place, plus, with the addition of Mitel, we do have a lot of things to be excited about going forward, and the key is our durable growth model. So I think there will be no showstoppers for the years to come.

Got it. And maybe just a follow-up for Anand. So obviously, some big news today with Mitel. There's just a lot of potentially hardware vendors and carrier vendors that you can work with. Are you — is it starting to get to a point with some of these potential partners, where it's — why they aren't going with RingCentral? And how confident are you in the cadence to continue to add new partners as you kind of continue to build out that global opportunity?

Yes. Why don't I take that? So a couple of things. One is it's not just — we've talked about the three, we've talked about Mitel. We also have partnerships you guys haven't asked about yet in the carrier and service provider space. So there's many different layers and types of partners and we are confident on this journey of layering on more partners for more kinds of growth coming on. And that goes back to what Vlad said earlier, which is the partner-first mindset which RingCentral displays, is as critical to establishing these partnerships in addition to the innovation and the RingCentral MVP platform being the best UCaaS solution in the industry, both of them equally matter, and we are just getting started as Vlad always says.

The next question comes from Sterling Auty with JPMorgan.

Just a quick congrats and good luck with the next step, Mitesh. It will be great to work with you again in the future. In terms of the business, on the Mitel opportunity, can you help us understand what your initial thoughts are around pricing for users, given that it's this hybrid approach instead of full UCaaS? And what the migration plan for those users over time will be to full cloud and how that pricing evolves?

Sure. I can take it. Look, I think the punchline here for Mitel's partnership is that we will be converting the base to our product. So the pricing will follow what we have done in the past. And on that note, our ARPU has been super stable and our ARPA has been increasing. So I think you will see more of a continued story there.

I also want to comment on the point you had, Sterling. Strategy is not hybrid; the strategy is full cloud, no questions asked. What CloudLink offers us is the ability to transition customers in big steps, with them using messaging and video, RingCentral messaging and video from the cloud, while still utilizing their on-prem for voice. But there is absolutely no doubt in anyone's mind or myself that the end result is going to be MVP with messaging, video and phone all being in the cloud. So once those customers transition, we would expect same, if not better pricing. As they would be more familiar with the platform, it would be a smaller step for them to take. But even in the interim, of course, we're hoping to be able to monetize our messaging and video technology to Mitel's 35 million users. Just want to reiterate that this has never been done before in the industry and is an absolute first. Once the jury is out, we have to see how users react. But for now, it seems that it should remove a major obstacle as people consider their digital transformation.

That makes a lot of sense. And maybe just one follow-up, if I could. On Microsoft, with the announcement and I forget the exact term if it's Operator Connect, then they have the direct program, where does RingCentral fit in each of those programs? And are some of the announcements that have been made over the last quarter, does that diminish your opportunity to participate and win business alongside Microsoft?

Microsoft has many ways of addressing telephony because they do not have a viable cloud PBX product. So let's start with that. They have Direct Routing, which is actually a tailwind for us, which allows cloud UCaaS providers like ourselves to plug into Microsoft's large Teams user base. But remember, those users are using Teams messaging and Teams video by and large, not Teams telephony. So this is where we come in and our direct partners. We are doing very well there. We haven't broken out the numbers, but I can tell you that it is definitely a growth driver for us. If you just look at Teams and Direct Routing as a subsegment. Now as far as Operator Connect, the latest thing, this is for service providers like AT&T and Verizon to plug directly into the phone part of Microsoft. And frankly, that capability was there for a long time anyway. It doesn't change the fact that Microsoft, again, really does not have a competitive PBX product in the cloud. They don't have a competitive worldwide global footprint like we do. And frankly, it's just another admission of the fact that their technology is incomplete. Their MVP strategy, and by the way, they are the only other ones besides ourselves talking about the MVP strategy, but their MVP strategy has a good M, maybe a K for messaging and video, and not a strong P. Obviously, coming from our side, we have a very, very strong P as we continue demonstrating.

The next question comes from George Sutton with Craig-Hallum. They have a competitive PBX product in the cloud. They don't have a competitive worldwide global footprint like we do. And frankly, it's just another admission of the fact that their technology is incomplete. Their MVP strategy, and by the way, they are the only other ones besides ourselves talking about the MVP strategy, but their MVP strategy has a good M, maybe a K for messaging and video, and not a strong P. Obviously, coming from our side, we have a very, very strong P as we continue demonstrating.

Mitesh, I remember sitting down, you told me about the Salesforce.com model experience and how this was going to look like that, and I thought you were insane and look at you now. So congratulations. I'm a believer in video becoming the first decision that a new company is going to make versus phone. And I'm curious if you have started to do anything differently from a marketing of the video part of your capabilities as a result?

Yes. So let me start — Vlad, do you want to take it? I'll jump on. One, for us, the strategy is across message, video and phone. And as Vlad even shared in his prepared remarks, our customer base, the number of users who are using multiple modalities is large. People use messaging and phone, video and phone. So video is already an integral part of our strategy. The second thing I wanted to also share is all our new customers are defaulted on RingCentral Video at this point in time. All our strategic partners — the three As, Mitel now, and going forward, as you look at our carrier partners, Vodafone Business, et cetera, all of them are defaulting all of their new customers on video as well. So RingCentral Video is already going along in the right path. The third thing I would offer there is even looking at our installed base, over 70% of our installed base has already migrated to RingCentral Video. And by the way, when they migrate to RingCentral Video, we actually see their usage increase and perform better. So we feel that video is already on the right path as part of our MVP strategy. And that's where we go back to. People want a unified communication strategy across message, video and phone, and we feel we represent one of the best value propositions for customers in the market.

I just want to add a little bit, is that if you look at the new Mitel announcement, it actually very much plays into the trend that you have, that these may be video-led sales. The whole thing with CloudLink is the point that we will now be able to lead with video and messaging, while letting them move phone telephony at a later date. So it does play into that. And to double-click, the opportunity here, which is fairly immediate, is 35 million Mitel users, the vast majority of which are in regions where we already operate, namely the Americas and Western Europe. Another point is that while sales may be video-led, video is a lot less sticky than messaging or phone. We are seeing this now on the positive side as we are migrating users to RingCentral Video from other products, and that migration is going very well. As long as video experiences are sufficient and comparable, then people are happy to switch. People are not happy or able to switch their messaging for their business, which is why many competitors are doubling down on phone because they recognize the lead we have on technology. We are the only one with five nines reliability over three years. I would urge you to compare that record against any and all of our competitors. Between our strategic partnerships — Avaya, Alcatel-Lucent Enterprise, now Mitel — and something like 50% or 60% of top global carriers aligned with RingCentral, it's hard for me to see how this strategy won't play out very positively. There is a technological advantage and an almost insurmountable partnership advantage that we have. The remaining component of TIP is Trust, and we're second to none there as well. So pretty confident.

The next question comes from Meta Marshall with Morgan Stanley.

Just a question since the partnership allows you to kind of have more exclusive access to CloudLink, is that something where you could use that porting technology eventually with some of your other partnerships? Or do the terms require it to stay on the Mitel platform only?

Short answer: yes. RingCentral now owns CloudLink outright. There will be further cooperation between the companies in feature enhancements and other platform work. But it is our IP; a meaningful amount changed hands as part of this transaction. The reason for that is CloudLink and specifically our ability to not only apply it to Mitel's 35 million user base, but to apply it to other platforms as well.

The next question comes from Samad Samana with Jefferies.

First, Mitesh, congrats on having to guide RingCentral so well over the last several years. I hope you get some time off and I wish you the best on your next even bigger challenge, which is improving your golf game. Maybe on to the question, I wanted to maybe unpack the $650 million that's being invested into Mitel. How much of that is for the exclusivity in being able to transition the base versus the acquired IP? And could you have built it yourselves and are there minimums for the deal that you get in terms of minimum seat commitments?

Sure, Samad. I'll try on the golf game later. In terms of the $650 million, it's a combination of IP, exclusivity and CloudLink together. It's going to be hard for us to break down each component separately. The contract has many provisions which will be hard to get into on this call for competitive reasons. But rest assured, there are some industry-first elements we are doing which have never been done before. So stay tuned.

The next question comes from James Fish with Piper Sandler.

And congrats Mitesh here, the exit here and look forward to working with you down the road. Just for me, what are you guys seeing in terms of new endpoints, one between new users, one between those deals with the strategic partners versus kind of nonstrategic wins in terms of the big ones and the carriers, of course? And any way to think about how that mix could change longer term? And I'm going to sneak in a 1b here, did you guys provide an update on — in terms of where the CCaaS penetration is and what that mix is between reselling your third-party partners versus selling some of your own stuff?

Jim, maybe we can rephrase the question. A win is a win, and we're not picky; we like every win, regardless of where it comes from. Could you maybe ask the question again please?

Yes. I'm trying to understand what percentage of the new users you guys are getting are coming from the strategic partnerships that you have versus the nonstrategic partners that you have? So winning against Cisco, for example, or NEC, those kind of companies, just trying to understand how that is doing given the success you guys are talking about with partnerships, especially this quarter.

Let me take a first shot. All of these partners are layering on growth in the right way. Avaya had a really good quarter — record $1 million-plus TCV wins, good growth in seats, new accounts, transaction volume, strength in upmarket, strength in international. Atos is similar: strong sequential progress on large deals and an important driver of international growth. The carriers are getting better sequentially and year-on-year. We are building momentum in verticals — education, health care, retail — and we are seeing good upmarket benefit across the board with carriers. We also shouldn't discount the channel; the channel has been a foundation for us and momentum there continues. So it's hard to separate strategic versus nonstrategic — all varieties of partners are layering on growth, and that's driving the 12-point acceleration Mitesh mentioned on direct and partner ARR. Also, don't discount our direct sales force; they continue to put up strong wins across segments. It's a combined effort.

The next question comes from Matthew Niknam with Deutsche Bank.

Can you talk about the linearity during the quarter? And then any color on how Q4 has started out now that we're roughly halfway in?

Linearity was the usual for Q3; nothing unusual to call out there. And as far as the start to Q4, it's been a strong start for us in October. We saw the full results for the full month, and that has given us more visibility for the guidance for Q4.

That's great. Congrats Mitesh.

The next question comes from Will Power with Baird.

This is Charlie Erlikh on for Will. Congrats on the results and Mitesh, it's been a pleasure working with you. I just wanted to ask one question on contact center. How do you guys feel about your internal capabilities and your strategy to partner on the higher end? How should we think about that strategy going forward? How should we think about your plans for your internal capabilities going forward?

That's a great question. It was a fabulous quarter for contact center. New business growth has been really good, triple-digit year-over-year with strong enterprise momentum. We've shared that over 60% of the $1 million-plus TCV deals included contact center. Our playbook is consistent: we have a very strong partnership with NICE CXone for digital-first use cases, and for other use cases we work with that partner as well. The partnership strategy has been working really well and the mix has been stable over the quarters.

The next question comes from Alex Zukin with Wolfe Research.

Just a quick housekeeping one. I guess if we think, Mitesh, around the unit economics of the latest partnership with Mitel from an ROI or cost of customer acquisition basis, how would you compare it to the others — the other deals? And how should we think about the progression? I think you mentioned that the progression of seats or the on-ramp for this one could be faster than the others. So how do we think about that? And then on the margin side, obviously, some good margin progression this year. But as we start thinking about next year, given the resumption of travel, the increased investment in sales and marketing, should we continue to assume margin leverage? Or should we kind of pause that in the model as we reopen?

Alex, thank you. Amazing job packing multiple questions into one. I'll try to address them. The faster ramp is a function of RingCentral being the go-forward brand; there's no time to be spent on co-branding, so sales and channel enablement happens immediately. On unit economics, because there's enormous leverage for these partnerships on the sales and marketing side, the economics work such that these partnerships, especially Mitel, are massively accretive to the long-term model and margin profile of RingCentral. On leverage for next year: there is enormous leverage in the business model. If you look at our recurring margin — revenue less cost of goods sold and recurring costs — it's north of 50%. What we are doing is plowing those margin dollars into fueling further growth because the opportunity of hundreds of millions of seats is too big to pass up. So next year you'll see continuation of more of the same: enormous leverage but redeploying money to fuel more growth and increase the company's terminal value.

As good of a job as I do of asking multipart questions, I think you do an even better job answering them. So congratulations on the next step.

The next question comes from Siti Panigrahi with Mizuho.

Congratulations and Mitesh, what an impressive journey from $50 million to $1.6 billion, congratulations. So I wanted to ask you on the direct and partner growth. That's good to see that growth accelerating even this quarter and next quarter as well. So help us understand where are you at this point with Avaya partners? Any sense of timing as to how the growth from Avaya and other major partners that we have is going to stagger next year?

Sure, Siti. The way to think about the partnerships is to parse them out. Avaya is the furthest along in ramp; that's what you saw in Q3 and you will see in Q4. Atos is next in line, where we are seeing contributions coming on. Alcatel-Lucent should start contributing in 2022, which we flagged earlier. And then Mitel in earnest will be the back half of 2022. That's the layering effect. The beauty is that beyond 2022, these partnerships will provide a steady drumbeat of seats coming in for multiple years to come.

That's great. And we probably will see this acceleration growing.

The next question comes from Ryan MacWilliams with Barclays.

So we had the Avaya channel, then the reseller channel, and after today, I think it's fair to say we now have the RingCentral channel. But I kind of wanted to go a different direction and talk about your 1,400-seat win with the on-prem hospital with Avaya. That's pretty interesting, given how complex some of those deployments are for hospitals. So are you starting to see larger customers in sectors like the public sector or health care that have previously been slower to adopt cloud solutions starting to accelerate those cloud voice deployments?

Absolutely. That's why I said we are starting to see vertical strength coming from these strategic partnerships as well. Avaya showed early traction for bigger and larger wins converting from on-prem Avaya to Avaya Cloud Office, and we're seeing similar strength in Atos and some carrier partners. This was a record large $1 million-plus TCV deal internationally. Almost one-third of large $1 million-plus wins came from international. Specific verticals popping up are education, health care, retail and financial services.

The next question comes from Steve Enders with KeyBanc.

This is George on for Steve. I'll echo everyone else's congratulations. I wanted to follow up on a previous question about applying CloudLink to other partners outside of Mitel. Can you just explain the strategy a little more? Is the idea to sell this as a product into those bases? Or is it to utilize it as a tool to help accelerate their adoption curves? Just any color would be helpful.

CloudLink is middleware. The value of CloudLink is to allow for transitional deployments. Monetization will be from MVP — messaging, video and phone — and RingCentral will monetize the cloud components. Mitel will continue monetizing their on-prem piece for as long as that exists. The differentiating part is that we will be able to monetize the messaging and video parts sooner without having to wait for the full phone transition.

The next question comes from Michael Turrin with Wells Fargo Securities.

Congrats to the team on the results and Mitesh, congrats on stepping down on a very high note here. I just wanted to sneak one in on international. I know Anand referenced it a little bit just a moment ago, but the degree to which you're expanding there stands out, now partnerships in Mexico, licensing in India. So global footprint continues to expand. Can you just put some context around where you are from an international standpoint and how some of those investments help differentiate, whether it's region-specific or just from a multinational perspective?

It is many layers. A lot of the partnerships help extend our international reach. Atos has been a powerhouse in driving international wins. We became the first global cloud provider to be granted a unified license by the Indian Department of Telecommunications, which is a milestone. Security matters — five nines reliability, end-to-end encryption for RingCentral Video, data privacy and data residency options — these all matter for international customers and upmarket wins. We haven't even talked about Vodafone Business and Deutsche Telekom coming on soon. Mitel also has significant international presence. So we are bullish on international contribution to the overall business.

The next question comes from Tim Horan with Oppenheimer.

Great quarter. Vlad, can you just talk about the conversations with enterprise customers now that we're kind of pulling out of COVID? Do they realize hybrid work is going to be the new normal and maybe they should accelerate the timing of cloud adoption? And do you think we can kind of see maybe two to three years accelerate adoption versus five to six years previously?

RingCentral was not a COVID story; our performance is consistent before, during and now. Our enterprise business is our fastest growing segment, growing over 60% year-over-year and is a very significant business at over $650 million of ARR. Hybrid work is here to stay — work from anywhere hasn't changed and we don't think it will. We're seeing renewed interest in CCaaS as well. Our core business remains very strong and with the Mitel relationship and CloudLink we think we are well positioned for this hybrid future.

This concludes today's call. Thank you for attending today's presentation. You may now disconnect.