RingCentral, Inc. Q2 FY2022 Earnings Call

Hello, and welcome to the RingCentral Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please limit yourself to one question. Please note, this event is being recorded. At this time, I would like to turn the conference over to Will Wong, VP of Investor Relations. Please, go ahead.

Thank you. Good afternoon, and welcome to RingCentral's second quarter 2022 earnings conference call. I'm Will Wong, RingCentral's Vice President of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Mo and Sonalee, followed by Q&A. We also have a slide presentation available on our Investor Relations website that will coincide with today's call, which you can find under the Financial Results section at ir.ringcentral.com. Some of our discussions and responses to your questions will contain forward-looking statements, including our third quarter and full year 2022 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. 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.

Thanks, Will. Good afternoon, everyone, and thank you for joining our second quarter earnings conference call. While we are not immune from the current macro environment, we delivered a strong Q2. Let me start by giving you five contexts. One, we are a $2 billion ARR company; two, contact center is now over $0.25 billion of ARR and is a key growth driver for us; three, we are now at more than 5 million paid seats in our base; fourth, we matched our quarterly record of $1 million plus TCV deals, bringing the total to almost 500; and five, we delivered a record operating margin in the quarter of 11.3%, up 110 basis points year-over-year. These results demonstrate RingCentral's leadership position in UCaaS, driven by our product innovations and unique go-to-market strategies. We have been able to achieve these milestones through consistent execution. Q2 was no exception. Sonalee, who I'd like to welcome to her first earnings call as RingCentral's CFO, will share with you more details about our financial results shortly. Let me first give you the highlights. Subscription revenue grew 32% year-over-year and 33% on a constant currency basis. Total revenue grew 28% year-over-year, and 30% on a constant currency basis. Both were above the high end of our guidance even taking into account the stronger dollar. Operating margins of 11.3% were a quarterly record and well above our guidance, with free cash flow margins expanding 220 basis points year-over-year to 6%. Following solid margin expansion in Q1, these results give us confidence in our ability to deliver sustainable growth while expanding our margins. Our success to date is grounded in four global megatrends. These are: one, the cementing of hybrid work in the post-COVID era, which in turn reinforces the need for cloud-based communications platforms; two, the ongoing adoption of mobility by businesses worldwide, which drives the need for solutions that enable work in any mode on any device from anywhere; three, Teams in the enterprise, which creates a meaningful opportunity for a well-integrated enterprise-grade UCaaS and CCaaS solutions; four, preference from CIOs to purchase an integrated cloud-based unified communications and contact center from a single provider, consistent with historical on-prem buying behaviors. Voice remains a key mode of communication for consumer to business interactions across a vast array of industries. This includes health care, professional services, such as insurance and finance; logistics, government and education, to name a few. We continue to win in all these verticals. Another fun fact. We've recently engaged a third-party to conduct a survey of key technology purchase decision makers. 85% of respondents consider voice to be very to extremely important to customer engagement. 80% noted that voice is very to extremely important to revenue generation. We continue to win because of our core corporate values: trust, innovation, and partnerships. Third, trust for our customers, this marks the 16th consecutive quarter of five nines uptime, which is a key competitive differentiator. Our customers need to know with certainty that when their customers need to reach them or when they need to communicate with any of their stakeholders, the technology will work. Time and again, customers tell us that one of their top reasons for picking RingCentral is our proven reliability, underpinned everything we do is our dedication to security and data privacy. Simply put, we treat our customers' data like our own. We also embed state-of-the-art capabilities such as end-to-end encryption into our portfolio. And speaking of trust, we are proud to announce that yesterday, we released our 2021 Impact Report, which highlights our commitment to our customers, our people, our shareholders, and the communities we operate in. Second, innovation. RingCentral is committed to leading with innovation, creating features and functionality that customers want and need. To highlight a few of our significant innovations in Q2, we launched new enhancements with our Salesforce and hotspot integrations, making it easier for our customers to reach and engage with their prospects and customers. For large international deployments, we introduced a Smart Dial Plan and a new bulk number management capability. These innovative features make it easier for international enterprises to connect their employees and customers across the globe. We have also enhanced RingCentral Rooms with new seamless integrations with hardware partners like Avocor, Jabra, and EPOS. This allows customers to enhance their ability to work from anywhere, whether in the office or remotely. And last but not least, partnerships. We had a good quarter with our strategic partners, led by Mitel and Avaya. On that note, we would like to welcome Avaya's new CEO and reiterate our commitment to this unique partnership that paved the way for the world's largest installed on-prem customer base to move to the world's leading UCaaS solution. Our unique global partnerships have contributed to our growth as customers transition from on-prem to the cloud and we're still relatively early in this journey. Looking ahead, we're strongly focused on durable growth, improving profitability, and stronger free cash flow. We have the industry's leading UCaaS platform and a talented management team in place to drive our continuous success as we address the large untapped opportunity still ahead of us. With that, let me hand the call over to our President and Chief Operating Officer, Mo Katibeh.

Thanks, Vlad. Q2 was a strong quarter with strength from our direct business and our partners. We won close to 50 deals with a TCV of over $1 million. Our integrated market-leading UCaaS and CCaaS offering also performed very well with continued increase in the attach of CC on UC for our upmarket teams, and we were able to achieve these results while driving revenue and operating margin growth. In short, we executed well. Now, let me give you some examples of how we benefited from the four megatrends that Vlad outlined. First, hybrid work. Companies are enabling their people to work from anywhere, and RingCentral helps them be productive wherever they are. As an example, C&S Wholesale Grocers, a US industry leader in supply chain solutions and wholesale grocery supply, recently selected RingCentral to replace their legacy PBX infrastructure. Here's what C&S had to say: 'As we researched cloud solutions to replace our PBX infrastructure, we saw that with RingCentral, we could integrate a whole suite of communication features in one platform, connect our dozens of offices across the country for the first time ever, empower our employees to communicate from anywhere and still save $1 million a year.' Second, mobility. One of the largest real estate brokerages in the United States needed a solution that seamlessly allowed their offices to back each other up and securely wrap calls to their thousands of agents, whether in the office, at home or in the field. And beyond creating a truly mobility-centric solution, the brokerage was able to recognize meaningful ROI by selecting RingCentral with $2 million of savings over five years via a transparent and predictable cost structure. Third, Microsoft Teams, which continues to be a growth driver for RingCentral. Second quarter was the single largest quarter of growth yet. Now, the vast majority of Teams customers are on E1 or E3 licenses, which do not include any sort of phone or telephony service, a key part of any business identity. This creates an immediate opportunity to complete the cloud communication suite by adding a well-integrated UCaaS solution like RingCentral. And as to the minority of Teams customers who have an E5 license, first, they still require an incremental calling plan to make calls outside of their company. And even more importantly, they often need a richer feature set, five nines reliability, and integrated contact center option and a larger geographical footprint, all things that RingCentral can offer. In short, customers are benefiting both from a feature and cost perspective when adding RingCentral to their Teams environment. For example, a global provider of professional services purchased Avaya Cloud Office this quarter. The customer uses Teams for messaging and video but required a telephony option that provided five nines reliability and global reach. In evaluating their different options, they concluded that adding telephony to Teams was more costly and offered less reliability and functionality compared to RingCentral. These cost savings are in addition to the ROI that the customer will realize as they reduce resources that supported several legacy systems. And last but not least, customers want an integrated UCaaS with CCaaS solution. RingCentral is currently the only company offering a fully integrated solution, combining market-leading UCaaS and CCaaS on a single bill and leveraging a highly scalable and reliable global voice network. Preferred Risk Insurance, a professional services company, highlights the benefits of our integrated UCaaS and CCaaS solution. Preferred Risk Insurance encountered significant challenges during the pandemic, using legacy communications technology, which caused call quality issues and broken customer experiences. It became vital for the company to upgrade to a cloud solution that would allow their employees to call, message and meet in one app from home or in the office. They also required a cloud contact center that would provide innovative features. For example, with RingCentral Contact Center, they will now have the ability for their claims agents to take a recorded statement that can be added to the insurance claim while also ensuring that they can still leverage end-to-end automated call recordings for compliance purposes. Net, RingCentral is continuing to benefit from the four megatrends that we've outlined, and we see this in our pipeline and our partnerships. Regarding our pipeline, we saw three key trends this quarter. First, sales cycle times from opportunity to close have reverted to historical pre-COVID trends, which we expected. Second, demonstrating demand, we saw an increase in leads quarter-over-quarter and year-over-year. Third, opportunity size for small business has remained consistent. However, we are seeing cautiousness from larger customers in their buying decisions, focusing on smaller initial deployments. What is clear is customers ranging from small business to enterprise and across all verticals continue to see the value of our offerings while also being mindful of broader near-term market forces that are influencing buying behavior. As part of our diverse vertical go-to-market approach, we are focused on how moving to UCaaS from an on-premise solution generates a strong return on investment for our customers. In the current environment where many customers are looking more closely at their spend, we show value very quickly with an average customer payback of about nine months. Customers that move to RingCentral MVP on average are also able to reduce their telecom costs by 23%, their hardware costs by 20%, and their IT spend by 16%. Turning to our partnerships, we continue to see growth from our strategic partners and the GSP community. Seats from our strategic partnerships are up almost 100% year-over-year. Mitel continues to gain traction as endpoint compatibility remains on track, and we continue to onboard their channel partners. Avaya also continues to consistently add seats to our growing base with another sequential growth quarter. We continue to believe that there is a meaningful opportunity for ACO as a destination for Avaya's customers, which represent the world's largest installed on-premise base. Partners remain part of our differentiated go-to-market strategy and are contributing to our $1 million plus wins in the enterprise market. Last, international continues to be an area of opportunity. In addition to recently launching with Vodafone in Germany, we closed multiple million-dollar TCV wins outside of North America and launched services in new geographies. We continue to build up our efforts globally as we are still early in the opportunity. To summarize, we had a strong quarter. We win because of our unmatched best-in-class product, go-to-market motion, and our ability to address customer needs and pain points with clear value and ROI. Now I'll pass it over to Sonalee to discuss financials and our guidance.

Thanks, Mo. It's a pleasure to be here on my first earnings call as RingCentral's CFO. I've met some of you since I joined in May and look forward to spending time with more of you in the coming weeks and months. I chose to join RingCentral because I saw a compelling opportunity to join a category leader in a high-growth space, operating at scale. Importantly, RingCentral is one of the few high-growth SaaS companies with a $2 billion revenue run rate, expanding operating margins and free cash flow. My first few weeks have reinforced my belief that RingCentral is still in the early innings of a tremendous market opportunity, and I look forward to sharing our progress with you in future quarters. As RingCentral's CFO, my top priority will be driving efficient growth. This includes expanding operating margin and free cash flow while investing in and driving our future growth. I will be firmly focused on creating value for our key stakeholders, which include our customers, our employees and our shareholders. With that, let me turn to our Q2 highlights. Q2 was a strong quarter. All key metrics came in above the high-end of our guidance, and we delivered a record operating profit margin. Subscription revenue rose 32% year-over-year to $463 million, above the high-end of our guidance range of 28% to 29%. Adjusted for constant currency, which represented a roughly 1.5 point impact, subscription revenue rose over 33%. As we highlighted last quarter, balancing growth and profitability is one of our core tenets. I am particularly pleased with the improvement in our non-GAAP operating margin of 11.3%, which was meaningfully above our previous outlook of 10.4%. This was up 110 basis points year-over-year and continued the expansion we delivered last quarter. Additionally, we ended the quarter with $306 million of cash on hand and generated non-GAAP free cash flow of $29 million. This represented a free cash flow margin of 6%, up 220 basis points versus last year. Now let me share with you some commentary around the key drivers of our results. Firstly, growth. During the quarter, we benefited from strong upsell into our base as customers continue to move to higher value and higher price points skew as well as expand their seats with us. Additionally, contact center continues to be a strong growth driver for us and is outpacing our overall growth. Many CIOs want to buy a unified communications and contact center as an integrated global solution from a single provider, and we are well positioned to benefit given our leading product and integration. Importantly, overall ARPUs remained stable quarter-over-quarter and year-over-year and are north of $30. Also, new customer acquisition ARPU remained steady over $30. Customers buy RingCentral because they see the value in our global integrated message, video, phone and contact center platform with advanced features, including analytics and AI and our consistent five nines reliability. We save customers money and improve their productivity. Regarding new bookings, we saw a $15 million impact from the stronger dollar. Adjusted for currency, our implied new bookings would have been over $100 million and consistent with last year's sequential trend. Now let me turn to profitability. Our solid operating margin starts with our industry-leading subscription gross margins of 82.7%. Additionally, margin improvement during the quarter was driven by realizing efficiencies such as more disciplined hiring and vendor consolidation while prioritizing investments in our core innovation and growth sectors. We will continue to take a balanced view of investments ensuring they meet return criteria. Additionally, we will be looking at all aspects of the business to evaluate further opportunities to drive efficiencies and continued growth. Now turning to guidance. I will provide you with an outlook that is reflective of what we see in the market today. Regarding the current macro backdrop, as Mo stated, we saw three key trends in the quarter: one, sales cycles reverting to pre-COVID norms; two, sales leads increasing quarter-over-quarter and year-over-year; and three, more cautious buying behavior from larger customers, manifesting itself in smaller initial deployments. We recognize that companies are navigating through a more challenging backdrop than what we saw even three months ago, as well as the impact of a stronger dollar. Taking this into account, for the third quarter, we expect subscriptions revenue growth of 23% to 24%. Adjusted for constant currency, we expect subscription revenue growth of 25% to 26%. Total revenue growth of 21% to 22%. Adjusted for constant currency, we expect total revenue growth of 23% to 24%. Non-GAAP operating margin of 12.5% and non-GAAP EPS of $0.50 to $0.51 per share. For the full year 2022, we are reiterating our top line guidance. We continue to expect subscription revenue growth of 27% to 28%. Adjusted for constant currency, we expect subscription revenue growth of 29% to 30%. We continue to expect total revenue growth of 25% to 26%. Adjusted for constant currency, we expect total revenue growth of 26% to 28%. On profitability, we are raising our full year non-GAAP operating margin outlook to 12%, up from our prior outlook of 11.5%. This reflects 180 basis points of year-over-year improvement at the midpoint. And we are increasing our non-GAAP EPS outlook range to $1.91 to $1.95 per share, up from our prior range of $1.83 to $1.87 per share. We have guided to 180 basis points of margin expansion this year, despite the strong dollar. Looking forward, we are committed to ongoing margin expansion and are reiterating our target of achieving at least a 20% operating margin with continued growth in our free cash flow. To summarize, we had a strong quarter marked by solid execution. We are well placed to navigate the current environment, and we will continue to invest in a disciplined manner where we see the highest return and potential for growth. Finally, I'd like to thank RingCentral's team and our Board for their warm welcome and support during my first few weeks here, as well as for their ongoing hard work and dedication to our shared vision. I believe we have a large opportunity in front of us and the right team to deliver sustainable, profitable growth and to create value for our stakeholders. With that, let's open the call to questions.

Thank you. We will now begin the question-and-answer session. Our first question today comes from Kash Rangan of Goldman Sachs. Please go ahead.

Hi. Thank you very much. It's great to see improvement in operating metrics and the success of the Teams channel. I have two questions. First, you mentioned being upfront about the macro environment and some level of caution. How do you see the second half of the year shaping up? What macro assumptions are you factoring in? Are you looking at smaller deal sizes or close rates, for example? I ask this because RingCentral usually experiences a nice pickup in ARR bookings in Q4. Should we still anticipate that type of seasonality? My second question is for Sonalee; congratulations on becoming the CFO of RingCentral. You mentioned focusing on operating efficiencies without compromising growth. What areas have you identified in the business model that could provide operating leverage as you aim for 20% growth? Thank you.

Thank you for the question and your kind words. I'm really excited to be at RingCentral and to work with this incredible leadership team. I appreciate your comments. To address your second question about balancing growth and profitability, this quarter serves as a strong example. We achieved notable subscription and total revenue growth while also significantly increasing our operating margins, reaching a record operating margin of 11.3%. We accomplished this through deliberate and efficient business operations. We specifically focused on areas like sales and marketing, R&D, hiring efficiencies, and vendor consolidation. As a result, we enhanced our operating margin while still delivering impressive revenue growth. Looking at our full-year guidance, we have raised our operating margin guidance for the second consecutive quarter. Our minimum operating margin aspiration indicates that positive outcomes are ahead. We will evaluate all areas of the business, and after a few weeks in my role, I've identified opportunities in sales and marketing efficiency, R&D efficiency, and vendor consolidation. Additionally, as we continue to grow as a company with a $2 billion revenue run-rate, we are seeing the advantages of scale reflected in our operating model, and we expect further progress in this area. Regarding macro trends, Mo mentioned that we noticed sales cycles returning to pre-COVID levels and some cautious spending from larger customers, leading to smaller initial deal deployments. Our guidance takes into account the current market conditions, including these trends. While we recognize the impact of a stronger dollar, which we estimate will affect revenue growth by about 1 to 2 points, we also see strong demand from our customers and a robust pipeline, with quarter-on-quarter and year-over-year increases. We believe the demand for our product is incredibly strong. As CFO, I see the switch from PBX to cloud as a straightforward decision due to its positive ROI and quick payback. We feel more relevant than ever in this macro environment. Our guidance reflects our current observations, including the state of today's macro. I don't know if Mo has anything to add.

Very comprehensive answer. Move on to the next question.

Next question, please.

Our next question is from Terry Tillman of Truist Securities. Please go ahead.

Yes, thank you for taking my question. It's one question, but two parts. Sonalee also welcome to RingCentral. Congrats. And also, thanks for the color on the ARR, the exit subscription revenue ARR, that's very helpful. The two-part question. The first part is for Mo. I'm just trying to reconcile, it sounded though you still have pretty good productivity, though, $50 million or so or near $50 million-plus TCV deals. So I'd love to just understand some more color in terms of they clearly are starting a little bit smaller is it less contact center seats, or is it maybe half the size of the deployments? And then the second part of this question though is, for you Sonalee, is people do look at that exit subscription revenue ARR because it has implications into the next kind of 12 or 15 months. Should we see it kind of ramp up though as we exit the year even with these puts and takes because of all the growth initiatives and channel partners? Thank you.

Okay, Terry. So let me take the first half of that question. And I think the punchline is, I articulated, leads were up in the quarter, both quarter-over-quarter and year-over-year. What we are seeing is a degree of cautiousness in terms of our larger customers generally going with smaller initial deployments. You made a comment around contact center. I'll tell you that our attach rate of contact centers is continuing to go up. So that certainly is not a factor in play. It's really just about I think the buyers are looking at any potential impact on their own business, what's happening with their own budgets, testing the technology, if you will, of deploying in smaller ways, seeing the value creation that we spend a lot of time talking about with our various customer examples and then bringing it to life.

Sure. So firstly, Terry, thanks for your kind wishes as well. So, with respect to ARR, as you know, we don't specifically guide to ARR. I am really proud of what we achieved in the quarter, 31% growth in the second quarter. We did have obviously an impact from FX and that obviously is a negative impact for this quarter. But we will continue to add healthy bookings and feel really confident in the way that we guided for both Q3 and the full year. So, hopefully that answers your question.

Operator, next question.

Our next question comes from George Sutton of Craig-Hallum. Please go ahead.

Thank you. Sonalee, my great wishes as well, congratulations. So I'm curious, as a user of stock compensation with the stock decline, how are you using it perhaps differently today relative to retention and/or new hires?

Hey, George, I hope you're doing well. This is Mo. Look, we've guided that we expect to bring stock-based comp down year-over-year this year by a couple of hundred basis points. We're well on our path to achieving that, potentially even exceeding it by the end of the year. We're finding that our team and our talent is embracing the strategy. They're fully engaged on being part of this team. We're utilizing SBC where it's required. Clearly, we think about our employee base, superstar talent, key contributors, et cetera. Bringing that together, we're finding that we're able to find that balance of compensating appropriately, healthily while at the same time ensuring that we're bringing down the comp as a percentage of revenue year-over-year. I expect that we're going to continue to drive discipline in this space and improve over time.

Our next question is from Meta Marshall from Morgan Stanley. Please go ahead.

Great. Thanks so much and congrats on the quarter. Maybe Vlad or Mo, just as you gave the disclosure on how big the contact center business had become, kind of being over 10% of ARR, does that change how you guys think about partnering versus developing organically or just other feature sets that you would think on adding in addition to kind of contact center to expand the ARR of your customers or the ARPU of your customers? Thanks.

Yes, the contact center is very important. As we've mentioned before, we are in a unique position to offer market-leading UCaaS and CCaaS on the same platform and network, which sets us apart from others. Customers appreciate this. Traditionally, companies have purchased UC and CC from the same providers, primarily Avaya and Cisco. We are now observing similar trends in the cloud software as a service sector. While our top line growth is strong, ideally, owning the entire stack would be beneficial, though it's a significant challenge. Our current strategy appears effective and we believe it will continue to be so. For customers seeking top-tier UCaaS and CCaaS, our approach is distinct and leading in the industry. For those with simpler needs, especially smaller contact centers, we offer our own product called RingCentral Engage. This includes RingCentral Engage Omni, which provides essential features without extras, and RingCentral Engage Digital, which covers all voice channels. We anticipate sharing more details about these offerings soon.

Our next question is from Samad Samana of Jefferies. Please go ahead.

Hi. Good afternoon. Just a couple of questions. I guess, first, just I wanted to ask on the expense side. Obviously, it's been great to see margins really inflect here. Can you remind us, Sonalee, maybe how much of the OpEx is in USD versus in other currencies?

Hi, Samad, it's Sonalee here. I'll take that question. So OpEx is obviously a bit of a natural hedge to our revenues, but it's a much smaller proportion of overall and it would mostly be Euro-based. So it's about 5% that's outside of the US in the OpEx number.

The next question is from Peter Levine of Evercore. Please go ahead.

Great. Thanks for taking my questions. Sonalee, welcome to the team. As we continue to hear more buyers wanting to bundle collaboration, video and chat with voice in a bigger way, maybe Vlad, in your view, how would you debunk those saying that a video collaboration suite kind of takes priority over voice? And then maybe second, what are you doing today to elevate the RCV brand or the investments on the collaboration side to better compete against some of the larger players in the space?

Yes, both are important. In the B2B space, especially within organizations, many interactions—though not all—now occur over video or through internal conferencing tools like Microsoft Teams. However, C2B interactions, which are consumer to business, still predominantly happen over voice, and this trend shows no signs of slowing down. People generally prefer to call businesses and service providers using voice from their phones. Our surveys indicate that the vast majority of our business customers believe voice will remain important to extremely important for customer engagement, margin expansion, and revenue generation. Voice is clearly here to stay; this call we are having right now is an example of that. Voice communication continues to play a significant role in business transactions.

The next question is from Ryan McWilliams of Barclays. Please go ahead.

Thanks for taking the question. Just on the strategic partnerships in which RingCentral has made a significant investment. Should those strategic partners enter financial difficulties or were acquired, would you anticipate any changes to those relationships?

I will take that. Look, we have an absolutely unique GTM approach and the partner network. There is simply not another player of I think any size that can both have these close relationships with a number of leading GSPs as well as be responsible for the majority of on-prem PBX. Now, this is turbulent times. Obviously, some people are experiencing difficulties. The question behind your question is what about Avaya. So let me just address that. Avaya has been a contributor. They have been a partner and a strong partner. They are representative of the world's largest installed on-prem base, which means what? It means that we always want more. We want it more; we will continue more. But they are, again, somebody that's been contributing to our success. We expect them to continue doing that. We expect that they understand that RingCentral continues to be both a growth driver for them as well as a profit margin driver for them. They have a new CEO that they've announced a few days ago, a person we know extremely well. I have a good personal relationship with Alan. We think this could reinvigorate the relationship with very positive outcomes for both companies and very importantly for the customers.

Our next question comes from Will Power from Baird. Please go ahead.

Okay, great. Yeah, thanks for taking the question. Just a question on enterprise ARR. We've seen, I guess, a deceleration in a couple of quarters in a row. And it sounds like FX is certainly a piece of that. But I guess I'm wondering how much of the slower growth there is macro? How much have you already seen on the macro side versus any other factors versus how much more of the macro that you referenced in terms of smaller deal sizes or slower deployments among your bigger customers are still on the come? I guess, I'm trying to figure how much that macro is already impacting that ARR versus maybe expectations for Q3 and Q4?

Thanks. This is Mo. I'll take that one. I think the net here is two key factors. The first one is FX was a headwind. Sonalee talked about that one. The second one is what I brought up, which was called the three key trends that we saw in the quarter: sales cycle times reverting to pre-COVID norms, leads were up both quarter-over-quarter, year-over-year. The third one, while opportunity size for SMB remains very consistent, we did see some degree of cautiousness from larger customers in their buying decisions. At the end of the day, I mean, I think I put all those things together. The lead growth continues to demonstrate to me that the opportunity ahead is real and that we can create value for our customers, especially larger ones that have legacy telecom hardware, IT support costs, where the value-creation that we can bring for them is actually a help when you're in these sorts of times.

The next question is from Matt Niknam of Deutsche Bank. Please go ahead.

Hey guys, thank you for taking the question. Just a quick simple one. Just on churn. Any changes you're seeing? And how is this trending across SMB, mid-market and enterprise? Thanks.

It's Mo, I'll take that one. We saw sequential improvement in churn, both quarter-over-quarter and year-over-year, and that was generally true across all of our key segments.

The next question is from Michael Turrin of Wells Fargo. Please go ahead.

Hey everyone, this is Austin Williams standing in for Michael Turrin. I wanted to inquire about the adoption of premium SKUs as you continue to expand into the higher market segments. Is this adoption helping to mitigate any volume-related discounts for your larger clients? Additionally, can you share if there have been any competitive changes in pricing dynamics for UCaaS that could be affecting the lower-priced SKUs? Thank you.

This is Mo. I'll jump on that one. Just to reiterate, our overall ARPUs were resilient. They were stable quarter-over-quarter, year-over-year. They remain north of 30. New customer acquisition ARPU, which really goes to the second part of your question, also remains steady and over 30%. To your point, we're a multi-product company. As we think about ARPUs, we're looking across both our SKU base as well as the products that we're offering. As we go further upmarket, we do see our customers buying more premium SKUs. As I mentioned a little bit ago, we're seeing continued increase in the attach rate of our contact center. All of those become factors in the dynamic that drives the strong and healthy ARPUs. Look, I think the heart of this is, we're creating value by bringing together messaging, video, and phone as well as the ability to integrate the market-leading UCaaS solution, and this is a competitive advantage that we expect to retain.

The next question is from Taylor McGinnis from UBS. Please go ahead.

Yes. Hi. Thanks so much for taking my question. So I know that FX is a little bit at play here, so I know it's tough to parse out. But Sonalee, if you look at the difference between ARR last quarter, I guess, subscription revenue in 2Q, it seems that some of the net new business would have been late in the quarter. So can you comment on linearity or what you might have seen there? And then, I guess, as we look ahead into the guide, just to be clear, are you assuming a similar environment that you're seeing today in the guide, or are you assuming that things deteriorate in imports or get worse?

Sure, Taylor. Thanks for the question. Firstly, regarding foreign exchange, you are correct that it was a factor in both Q1 and Q2. The impact on bookings in Q2 was more pronounced due to fluctuations in the dollar. Currently, our guidance reflects the present market dynamics, including the trends we've highlighted. Additionally, it takes into account an extra one to two points of headwind on growth attributable to a stronger dollar for the full year 2022. To summarize, while Q1 experienced an impact, Q2 was more significant, and we're projecting an effect of one to two points for the entire year. Despite the influence of the dollar in Q2, we still achieved over $100 million in bookings if adjusted for currency.

The next question is from Matt VanVliet of BTIG. Please go ahead.

Yes. Hi. Thanks for taking my question. I guess, as you look at the expansion of the Vodafone Germany deal that you announced recently in light of all of the strategic partnerships. Do you feel like you're getting to market a little faster? Is the initial reception stronger? How are you feeling as you continue to expand, sort of, the breadth of those relationships and even the depth within each of those partnerships? And how that's encouraging you to go out and seek other partnerships going forward? Thanks.

Thanks, Matt. As you think about our global service provider community, we're continuing to see consistent revenue and seat growth. The heart of your question and the way I'd answer it is each of these relationships is allowing us to unlock new sales addressable markets and frankly, unlocking new markets for the foreseeable future. I expect the new revenue-producing GSPs will continue to grow both this year, as well as in 2023, and many of them internationally.

The next question is from Michael Funk of Bank of America. Please go ahead.

Yeah. Thank you for the questions. One for Mo, if I could. Mo, given your unique experience coming from AT&T and your first point about the success for RingCentral part of that being the transition from PBX. Just wondering if you could comment on your TBV reported weaker business revenue this quarter. I think part of that probably is that transition that we’re seeking from legacy next-generation technology. So from your perspective and your history, do you think we're seeing acceleration in that transition? Is that what we're seeing in the Verizon results? Obviously, a lot in there, but I'd love to hear you unpack that a bit.

Well, I appreciate the question. I certainly can't comment on any other company's results and subtending drivers. What I will tell you is that, I do fundamentally believe and it's a core part of why I came to RingCentral that UCaaS and the transition of legacy UC on-prem seats as well as legacy CC seats to use CCaaS is something that is going to last for many years to come. Businesses are not all ready to move to the cloud in any one given year. Frankly, as you look at the current macro environment, I think that that's going to be a factor that plays in. We've called it out several times throughout this conversation. But what I am comfortable and confident in is that the total addressable market is extremely large and that you're going to see consistent growth for many, many years to come.

The next question is from Matt Stotler of William Blair. Please go ahead.

Hey, team. Thank you for taking the question. Maybe just wanted to dig in on Microsoft Teams specifically, obviously, you guys are still seeing some notable success in the market alongside Teams. Any additional color you can provide, whether it's in terms of the portion of the installed base that either connected Teams or assist with Teams? Any kind of updated color on how to think about ARPU and Teams environments here? And then any thoughts on additional opportunities for collaboration with Microsoft as you think about go-to-market and further integration going forward?

Very good. I'll address that slightly out of order. On the ARPU side, our Teams' ARPU aligns well with our overall ARPU and is quite strong. Our Teams' customers tend to be larger and more premium, which increases the likelihood of attaching contact center services. This, along with five nines reliability, feature functionality, and geographic reach, are key reasons why we are successful with that base. We experienced significant year-over-year growth, with the second quarter being the largest individual quarter of growth we've seen in our MS Teams practice. It's exciting for us as we witness their growth in the market, which translates to success for us as well. While I can't comment on any potential future opportunities or our thinking around them, I can assure you that we will continue to execute on our strategy, which is one of the four megatrends and growth drivers for the company.

This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.