Good day. And welcome to the RingCentral Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Will Wong, RingCentral’s Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon. And welcome to RingCentral’s third quarter 2022 earnings conference call. I am 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 fourth 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 will turn the call over to Vlad.

Good afternoon. And thank you for joining our third quarter earnings conference call. We had a solid quarter and exceeded our guidance on every key metric. Total revenue of $509 million was up 23% versus last year and above our outlook of $502 million. We achieved these results despite an increasingly difficult macro environment. While it is hard to predict the exact timing of an economic recovery, we are confident that RingCentral will continue playing a prominent role as businesses rationalize their spending and strive to be more efficient via digital transformation efforts. We serve a mission-critical need and provide customers value as they migrate from legacy systems to the cloud. Additionally, we delivered a record quarterly operating profit margin of 13.5%, up 300 basis points versus last year. This was significantly above our guidance of 12.5%. Looking ahead, I am confident in our ability to deliver strong operating results, which includes meaningfully expanding profitability. To this point, we are now targeting operating margin expansion to open at least 350 basis points in 2023. This puts us on an accelerated path to achieving our prior commitment of at least a 20% operating margin. Now let me share the reasons why RingCentral is winning in the UCaaS market. First, we win because we believe we have the world’s best cloud phone system. Innovation is part of our DNA. We will continue to make targeted investments in key growth areas such as AI, analytics and contact center and provide differentiated, intelligent and connected experiences to our customers as they proceed with their digital transformation. These investments will further add to what we believe is the most complete cloud PBX solution in the world with features for every type of user and use case. With over 8,500 private and public applications and an ecosystem of over 75,000 developers, we enable customers to innovate on our platform. This includes over 150 pre-built telephony apps, over 330 pre-built apps for UC and CC, and the most advanced integrated contact center experience. One integration example is with Salesforce. Our integration lets customers make and receive calls, schedule RingCentral Video meetings and quickly assign call dispositions, all without having to leave Salesforce. Customers are also able to make and take customer calls from anywhere in the world, with advanced features such as offline and multi-call login that no other provider has; users can save time, which they can allocate to revenue-generating activities. This integration and the hundreds of other integrations we have developed, including with Microsoft, Google, ServiceNow, HubSpot, Zendesk and others, have helped us become an industry leader. But that’s not all. Other key differentiators include our outstanding 99.999% reliability, which we achieved for the 17th consecutive quarter, as well as our global reach with full availability in over 45 countries and presence in over 100 countries. We also support a wide range of endpoints, including from our strategic partners such as Mitel, Avaya, Atos and Alcatel-Lucent Enterprise. We also have a fully integrated IMS cloud architecture that enables fixed mobile convergence that is a key requirement from some of our GSP partners. Second, we win because of our unmatched partner ecosystem, which is made out of our strategic partners and multiple global service providers. We have a proven ability to partner with the world’s leading on-prem PBX providers, as well as leading service providers such as AT&T, BT, Telus and Vodafone. I am also very pleased to announce our upcoming relationship with Charter Communications, where we will be launching a joint offering for both SMB and enterprise businesses. Be on the lookout for more details in the coming days. And last but not least, we have over 15,000 resellers spanning the globe. We believe this gives us unrivaled assets to the large market opportunity ahead of us. Finally, we win because we are known as a leader in our industry. We are proud to be recognized as a leader in the Gartner Magic Quadrant for Unified Communications as a Service worldwide for seven years in a row, with the last recognition occurring in 2021. Cardinal also recognized RingCentral for being ranked number one in all four use cases in the 2021 Gartner Critical Capabilities for Unified Communications as a Service worldwide report updated August 1, 2022. Additionally, this quarter, the Tolly Group, a leading global provider of testing and third-party validation and certification, conducted a feature-by-feature comparison of analytics capabilities in which RingCentral met 100% of the specification criteria outlined in certain categories. The next closest vendor only met 30% in four of the 13 categories. Lastly, Synergy Research Group recently recognized RingCentral as the leader in UCaaS with over 20% market share based on paid seats, which is double the second and third place vendors. Big picture is that voice remains as relevant as ever. A good reminder of this is a recent survey of key technology purchase decision makers, which highlighted that 90% of our business leaders prefer to use the phone over other communication tools. This is true across companies of all sizes with use cases ranging from internal calls and meetings to external clients and vendor calls. Of note, we see this in our own customers as well, as more than 95% of our base actively used the phone. We are just at the beginning of the journey. There are 400 million telephony users worldwide, and many of those seats are expected to move to the cloud, driven by a number of clearly visible megatrends. This includes the shift to hybrid work, ongoing adoption of mobility by businesses, increasing reliance on distributed workforces, and the desire for integrated cloud-based UC and CC solutions from a single provider. Synergy recently concluded that just 21 million UCaaS seats are in the cloud today, which is a single-digit penetration rate. This highlights how early we are in the journey when comparing to the number of seats that are still on-prem and are yet to be migrated. Looking forward, we will remain laser-focused on delivering a best-in-class UCaaS offering by investing in innovation and driving profitable growth. Throughout the year, we have taken steps to expand our operating margins and drive efficiencies throughout our business. While we recently made the extremely difficult decision to further rationalize our workforce, we believe this will allow us to be more agile and better align our costs with our strategic priorities in the current macro environment. This decision was not made lightly and we understand the impact this has on our people and their families. We are taking meaningful action to help ease the transition for our impacted employees. We want to underscore how grateful we are for their hard work and all their contributions. RingCentral would not be where we are today without them. Finally, I want to reiterate how proud I am of what we as a company have accomplished, building from two guys in the garage; we are now a $2 billion recurring revenue business with leading share and an unrivaled platform. I believe we are well positioned to emerge even stronger as the economic recovery begins. Now let me turn the call over to Mo.

Thanks, Vlad. Q3 results were solid as we continue to execute despite a more challenging economic backdrop. We had solid new deal activity highlighted by multiple $1 million-plus TCV wins. We also saw good activity from strategic partners and our contact center attach rate was again over 60% for our large deals. Let me give you a few examples of our recent wins. First, a win at HealthComp with our newest strategic partner, Mitel. HealthComp is one of the nation’s largest third-party benefits administrators. They chose RingCentral to be their communications partner for both UC and CC as part of their enterprise-wide digital transformation. Our integration with Teams, which they currently use, was key in helping us win this deal. This is in addition to our leading voice and advanced eFax, SMS and integrated contact center capabilities, which Teams does not offer. Relative to our contact center, HealthComp is now able to expand customer outreach to all channels, including voice, chat, email, social and 30-plus digital channels. And importantly, we enabled HealthComp to save money by routing calls to the first available agent, which also reduced agent idle time as well as by enabling them to utilize analytics to determine productivity opportunities. We continue to see customers like HealthComp choose RingCentral due to our best-in-class integrated UCaaS and CCaaS platform. Second, in the current environment, cost savings are also an important catalyst in driving purchasing decisions. For example, a large Fortune 500 company in the logistics sector with operations in over 50 countries selected Avaya Cloud Office by RingCentral to help them consolidate disparate systems created over many years. Multiple IT teams were required to maintain these systems, which also ran on separate carriers, resulting in higher operating costs. Moving to RingCentral’s cloud infrastructure will enable them to quickly replace outdated equipment and improve collaboration and communication, all while showing an overall reduction in the total cost of ownership by 30%. I also wanted to highlight a number of wins in the education sector, including a nearly 5,000 seat win at the University of North Dakota and an over 3,000 seat win at a large Midwest University. This continues the trend that we have seen in the last few quarters with many thousands of seats being added across school districts and universities. Now turning to our partners, our strategic channel and GSP partners also continue to be a key part of our go-to-market motion. Both Mitel and Avaya again grew new seats sold quarter-over-quarter. On the channel side, we saw a quarterly record number of leads generated and we expect those leads to translate into opportunities and sales over time. Also, our channel partners continue to drive incremental new deal activity, and we are part of over 60% of our $1 million-plus TCV deals this quarter. Channel partners enjoy working with RingCentral because we offer flexible paths to the market depending on their business needs and individual customer use cases, while also providing tools and training to help them succeed. Regarding our GSP partners, we continue to see positive growth, are beginning to ramp with Vodafone in Europe, and as Vlad stated, we are excited to begin working with Charter. And finally, we continue to invest in expanding sales internationally. We landed multiple $1 million-plus TCV deals outside the U.S., including with Healius, one of Australia’s leading healthcare companies, and we expect more as we ramp in the coming quarters and years ahead. Now let me provide you with an update on what we are seeing in the market today. Leads pipeline and win rates remain strong and stable. That said, sales cycle times for our upmarket customers, which reverted to pre-COVID levels last quarter, elongated incrementally in Q3 as customers required additional approvals before making purchase decisions. This also resulted in smaller initial purchases. We anticipate that this behavior will persist until the macro environment becomes less uncertain. These factors, along with the stronger dollar, were headwinds to our business this quarter. Of note, overall churn has remained stable throughout the year and overall ARPU remained stable and over $30. Sonalee will discuss in more detail how these trends are impacting our near-term financial outlook. Looking forward, the market remains large and underpenetrated, and we believe our leading product, ability to drive cost savings and unmatched partner ecosystem will continue to resonate with customers. And importantly, our focus on profitable efficient growth puts us in a stronger position going forward to capture that opportunity. To summarize, we had a solid quarter despite the current macro environment. Our leading product continues to differentiate us from others and our focus on execution and driving profitable growth sets us up well for the future. Now I will pass it over to Sonalee to discuss our financials and guidance.

Thanks, Mo. I will provide highlights from the third quarter and then discuss our business outlook for the fourth quarter and full year. I am very pleased with our Q3 results, which were above guidance across all key metrics. Subscription revenue of $483 million was up 25% year-over-year and above our growth outlook of 23% to 24%. On a constant currency basis, subscription revenue rose 27% year-over-year. Once again, overall and new acquisition ARPU held steady. Customers value our differentiated offering, which was the primary factor in the continued resilience of our ARPU. Subscription gross margins remain in the top tier of software peers and were again over 82%. Moving to ARR. ARR grew 25% year-over-year to $2.05 billion. On a constant currency basis, ARR grew 28%. Given the recent strengthening of the dollar, particularly versus the British pound, which is our largest exposure, currency represented a $19 million headwind this quarter relative to the second quarter. As a reminder, we adjust our entire ARR base using currency rates on the last day of each quarter. Now moving to profitability, operating margin was a record 13.5%, up 300 basis points versus last year, and a full 100 basis points above our prior outlook. This is the third consecutive quarter that we have solidly exceeded our operating profit margin outlook, which demonstrates our ability to execute on our strategy of driving efficient growth. Our margin improvement was and will continue to be driven by four main levers. One, we are seeing the benefits of operating leverage as we scale above $2 billion in recurring revenue. Two, we are prioritizing more efficient labor spend and taking further steps to improve the productivity of our workforce. As Vlad noted in his opening remarks, we have made the extremely difficult decision to reduce our full-time workforce by approximately 10% to ensure our cost base is aligned with our strategic priorities in the current environment. Three, we are rationalizing program spend such as marketing and lead generation activities to ensure they meet our hurdle rates, as well as being judicious around all discretionary spend. Four, we are consolidating vendors to simplify our procurement process, as well as drive savings across all functions. Now moving to our balance sheet and cash flow. We ended the quarter with $305 million of cash on hand. This is inclusive of $20 million of shares repurchased during the quarter. We generated free cash flow of $21 million in Q3 and $88 million year-to-date. Note that our free cash flow includes one-time cash outflows related to third-party relocation efforts and efficiency actions we took in Q3. Excluding these one-time items, our year-to-date free cash flow would be $119 million or a margin of 8%. During Q3, we recorded a $125 million non-cash charge related to our Avaya prepaid commissions balance given their recent public disclosures. Please refer to our third quarter Form 10-Q for additional details. We will continue to monitor the Avaya situation and take financial actions accordingly. As Mo noted, the number of ACO seats that Avaya sold continued to grow quarter-over-quarter. Now turning to guidance. This outlook is reflective of what we see in the market today. As Mo noted, leads, pipeline and win rates remain strong and stable. Overall churn also remained stable. However, sales cycle times for upmarket customers elongated incrementally in Q3 as customers required additional approvals before making purchase decisions. This also resulted in smaller initial deployments. While our SMB segment is proving to be resilient to the current climate, we believe enterprise customers are being more cautious given the current economic landscape and we don’t expect this to change in the near term. Taking this into account, for the fourth quarter, we expect subscription revenue growth of 19% to 21%, adjusted for constant currency, we expect subscription revenue growth of 22% to 23%; total revenue growth of 17% to 18%, adjusted for constant currency, we expect total revenue growth of 19% to 20%; non-GAAP operating margin of 14%, which reflects 350 basis points of year-over-year improvement; and non-GAAP EPS of $0.59 to $0.60. Note our workforce reduction actions will result in GAAP-only restructuring charges of $10 million to $15 million related to employee severance and benefit costs, which we expect to incur in the next two quarters. For the full year 2022, we are reiterating our subscriptions revenue growth outlook of 27% to 28%. Adjusted for constant currency, we expect growth of 29%. Additionally, we expect total revenue growth of 25%. Adjusted for constant currency, we expect growth of 26% to 27%. Lastly, we are once again raising our operating margin and EPS outlook. We now expect full year non-GAAP operating margin of 12.4%, up from our prior outlook of 12%, and non-GAAP EPS of $1.97 to $1.98, up from our prior range of $1.91 to $1.95. Throughout 2022, we have shown our ability to consistently deliver strong and improving profitability. At the start of the year, we guided to operating margins of 10.6% for 2022. We now expect an operating margin of 12.4% for the full year 2022 or up 220 basis points. Further, we plan to exit Q4 with an operating margin of 14%, which is up a full 350 basis points year-over-year. Looking ahead, we now expect operating margins to expand at least 350 basis points year-over-year in 2023, which accelerates our path to achieving our target of at least a 20% operating margin. We expect to generate a significant amount of cash flow over the next few years. This will provide us with increased flexibility as we look at capital allocation going forward, including our capacity to make strong ROI investments and increased optionality on addressing our March 2025 converts. To summarize, I am very proud of the quarter we delivered. RingCentral is well placed to navigate the current environment, and we have the financial profile and flexibility to invest in the significant opportunity ahead of us, while continuing to grow and expand profitability in a meaningful way. With that, let’s open the call for questions.

Our first question will come from Kash Rangan with Goldman Sachs. Please go ahead.

Hey. Thank you very much. Nice job on the operating leverage and good cost discipline here. I am curious to get your take on retention trends among small businesses. There’s been operating a bit of concern if there’s layoffs, etc., which continues to prevail, how might that affect the installed base, not that, that is what you are experiencing, but I am just curious to get your take on how you see the strength of the SMB ecosystem in your installed base. I really appreciate the slowing sales cycles in the enterprise market and more concerned about the SMB side? That’s it from me. Thank you so much.

Sure. Kash, hi. Vlad here. Great to have you on. Fantastic question. I am glad you brought that up. Look, I think many folks underestimate the resiliency of SMBs, and as you know, we have been through cycles and that been through cycles; we started out as an SMB company. We are now multi-channel, multi-segment, so have much wider exposure. But to your question, SMBs are fine. Now earlier in the quarter, in the first month of the quarter, we saw some elevated churn, not really in terms of churn and fraudulent activity, but everything has stabilized and it seems to be steady as we go for now. I will let Mo provide more detail, but I can tell you in these turbulent times, I think that the wider your base, the better is my take. Mo?

Kash, thanks for the question. Yeah. To answer the other part of it, our overall net retention remained stable and above 100% and we are going to continue to monitor SMB for any signs of a slowdown. But as Vlad said, it’s showing resilience, and even in terms of what we have seen so far in October is that small SMB continues to be pretty resilient. Sonalee, anything you would like to add?

Yeah. And Kash, the other thing I’d just say is that, certainly, from a collections point of view, we have seen absolutely no impact in terms of the SMB base; actually, if anything, cash has been stronger this quarter than in most recent quarters and also no change to bad debt expense on that count either.

Next question please, Operator?

Our next question will come from Meta Marshall with Morgan Stanley. Please go ahead.

Thanks for the guidance on 2023. How should we approach growth in 2023 considering the operating leverage you plan to demonstrate? To what extent is growth in 2023 influenced by macro factors versus your objectives for achieving operating leverage? Thank you.

Thank you, Meta, for the question. We appreciate it. You highlighted the operational leverage we've projected for 2023. Typically, we don't provide growth guidance this early in Q3 for the following year. As for the trade-off you mentioned, we don't really consider it a trade-off. We believe we can achieve operational leverage inherent in a SaaS model as we scale, especially now that we have over $2 billion in recurring revenues. Regarding macro trends, we noted that, as Mo mentioned, sales cycles are extending to pre-COVID levels. We're observing increased approvals, and sometimes multiple approvals, particularly with our larger clients. There has been a slight negative effect from smaller initial deployments affecting deal sizes, which worsened incrementally in Q2 and Q3. Additionally, we're seeing some foreign exchange impacts this quarter, and there will be further effects in our Q4 guidance, resulting in about an additional point of pressure on our top line. However, we’ve been focused on efficient growth this year, achieving 300 basis points of expansion in Q3, and we're guiding for an additional 350 basis points year-over-year in Q4. We've set a target of around 700 basis points improvement over approximately eight quarters, plus the 350 basis points for 2023 added to where we end 2022. We're experiencing benefits from scale and maintaining strict discipline on all aspects of our business regarding margin improvement, especially around labor costs. Recently, we made the difficult decision to reduce our full-time headcount by 10%, which will mainly impact Q1 of next year. We're committed to being disciplined throughout our profit and loss statement. Looking ahead to 2023, we're confident that operational leverage will contribute to improvements in operating margin, operating growth, and free cash flow as well. We don’t see this as a trade-off; instead, we are focused on driving efficient growth, which is our path forward.

Our next question will come from Ryan MacWilliams with Barclays. Please go ahead.

Thanks for taking the question and I would like to reiterate pleased to see the improving margins. Suddenly, what could the restructuring actions mean from a dollar perspective for next year or how do you think about that? Thanks.

Yeah. Thanks for the question, Ryan. So I think in my script, I was quite specific about the restructuring charge that we take as a result of the actions, so that’s anywhere between $10 million and $15 million, and that will obviously be a GAAP-only below-the-line charge associated with the restructuring. In terms of how to think about the overall impact of the headcount action, we have guided to 350 basis points of margin improvement for next year. And I said just now to Meta that we will see a significant uptick really in Q1 from those headcount actions. And what I would say is labor is a fairly strong or fairly big contributor to the overall margin improvement. But we are also going to post improvement in areas like skills and marketing, rationalizing procurement spend. There’s a list of over 50 initiatives that we are working on now. So the improvement will really be very broad-based across the P&L. But in terms of the headcount action, you should expect a $10 million to $15 million of P&L charge, and then obviously, the benefit will go through from Q1 and increasingly throughout the year.

Our next question will come from Michael Turrin with Wells Fargo. Please go ahead.

Hey. Great. Appreciate you taking the questions. Vlad, you have seen cycles before you founded this business in 1999. Can you put some context around how your playbook changes. It looks like there are some quicker actions you are making here. The margin emphasis is clear. But anything else you would point us and investors to that’s informing your decision process here based on prior cycles? Thank you.

Sure. To clarify, I’m not sure about specifics before 1999, but my general understanding is that cycles come and go, and eventually, synergy prevails. We are in a different macro environment now. RingCentral was a significant player in a large market, and we are not immune to these changes. However, we strongly believe that our work is important; we are addressing real needs for numerous businesses and millions of end users. Our end-user count exceeds 5 million, which is the largest in our industry, and we have about twice that in paying users. This is a significant asset that others cannot easily replicate in our space. Our top priority is to ensure our user base continues to benefit from our services, which include exceptional reliability, top-tier security, and a wide range of features that meet diverse needs. We also believe this cycle will eventually end, leading to another period of expansion. We want to be well-positioned for whatever positive developments lay ahead, whether that be next year or later on. In response to your question, we will definitely continue our strategy of innovation. The recent cutbacks we announced have mainly left our R&D team intact. We have several ongoing initiatives, especially in AI, analytics, and our platform. Our largest UCaaS developer ecosystem involves around 75,000 software engineers using our API, along with many prepackaged apps and integrations available in our App Gallery. These are key differentiators, and we plan to focus strongly on them. In terms of R&D, we aim to enhance our UCaaS and CCaaS offerings, focusing on better integration for cloud phone systems and cloud contact centers. On the go-to-market front, we recently announced a significant partnership with Charter Communications, a leading service provider in the U.S. We're excited about this and hope for more successes to come. We've been particularly successful with global service providers, including major telcos. Moving forward, we will continue to onboard new resellers and target the substantial market of 400 million on-prem PBX seats, with cloud market penetration around 5%, presenting ample opportunity. We anticipate a robust future, with our scale enabling us to continue growing profitably and transitioning to stronger profitability in 2023 and beyond. We believe we will emerge from this period even stronger.

Our next question will come from Michael Funk with Bank of America. Please go ahead.

Yeah. Thanks for taking the question tonight. So I don’t think the comment on the sales cycle was surprising. I heard that quite a bit this quarter. I did think that your tone around funnel and the business in general is actually more constructive and we have heard otherwise this quarter from other companies. So, just wondering if your partner relationships maybe are helping with the resiliency in your business, as an example if there are some wins that you are getting through the partner relationships?

Great question. Thank you very much for it. Yeah. As we called out, we are very proud of our broad go-to-market approach. We are offering our customers multiple paths to the cloud, whether that’s from the GSP community, Vlad articulated Charter, joining that group, whether it’s our VAR channel community, 15,000 plus strong, as well as our strategic partnerships with the legacy PBX on-prem providers. And to your point, yeah, absolutely, we have called out that multiple million dollar wins have come from those partnerships. We are continuing to work well across all three of those dimensions to address the cross-segment opportunity that exists in this extremely under-penetrated market. Thanks for the question.

Our next question will come from Peter Levine with Evercore ISI. Please go ahead.

Yeah. Hi, guys. This is actually Peter Burkly on for Peter Levine. Appreciate you taking the questions. Just curious, given Avaya’s financial situation right now, curious if you could share any potential risk to the ACO partnership. And then maybe any contractual provisions you have in place protecting that partnership from any change in control or restructuring at Avaya?

I'll provide a high-level overview. We have various contractual provisions in place, but we need to see how Avaya moves forward. We hope they remain independent and continue their operations. They are still the largest shareholder of on-premises seats in unified communications and contact center, which is significant. They have around $2.5 billion in revenue from a loyal customer base. Importantly, they do not have a UCaaS offering. Their only UCaaS product is ACO, and they are contractually restricted from developing another one. We are confident in our relationship since, for the last three years, they have agreed not to work on UCaaS, and there have been no indications that they have. This means that the approximately 100 million installed seats they have previously disclosed are mostly available to us. We are hopeful for Avaya's continued success, but if their situation changes, it does not affect the need for those on-premises customers to transition to the cloud. RingCentral remains the leading provider in unified communications-as-a-service, and due to our extensive collaboration with Avaya, we are well-positioned to support their customer base and endpoints effectively. Notably, despite their challenges, Avaya's performance improved in the last two quarters, indicating ongoing demand, which makes us cautiously optimistic. Mo?

I think you hit it all. I mean, just to recap, ACO seats that Avaya sold continued to grow sequentially quarter-over-quarter for the last several quarters. We are the only UCaaS provider that is compatible with Avaya endpoints. ACO is a bright spot for Avaya, and there are tens of millions of seats out there, and we have a right to win. We are the obvious choice for those customers as they are looking to migrate to the cloud at whatever point is appropriate for them. Thanks for the question.

Our next question will come from James Fish with Piper Sandler. Please go ahead.

Hey. Thanks for the question. Just want to touch base on the Avaya prepaid commission write-down. What would prevent it from being the rest of the prepaid commissions that are left there? Could we see another further write-down is really what I am asking or did we actually work through that $375 million now with the $125 million write-down? And additionally, I understand why you guys would be seeing a slowdown in the mid-market and SMB side, but why did enterprise as a segment here slow the fastest this quarter? Thanks, guys.

Thanks. I will address the first question regarding the Avaya non-cash write-down, and then I will pass it over to Mo to discuss enterprise. In the quarter, we recorded a $125 million non-cash charge related to Avaya prepaid due to their public disclosures, and we deemed it necessary given the situation. This decision does not indicate that we are backing away from our commitment. As Vlad mentioned, on a commercial level, we actually acquired more seats this quarter compared to the previous two quarters. We are still transferring seats at an increased pace. Regarding any potential further write-downs, it's difficult for me to provide insight, but like any prepayment or asset, we will assess it based on new information each quarter and conduct the necessary impairment testing, similar to what we did this time, so there's not much else to add on that front.

To pick up and hit on the second part of the question around enterprise. One thing to keep in mind is that, sequentially quarter-over-quarter, we did see about $20 million of FX hit, which is predominantly in that enterprise space. And then beyond that, it’s the reasons that I articulated during my prepared remarks, which is, hey, look, while leads and pipe and win rates remain strong and stable, we have a continuation of the trends that I outlined in the second quarter, which is modestly elongated sales cycles, very much aligned with what we were seeing in pre-COVID, as well as earlier, I am sorry, smaller initial deployments in the enterprise space. And look, I think every company is resembling that remark right now. Within RingCentral, we have recently changed our own purchase order process to give Sonalee and I even more visibility in what’s being approved, and we are seeing that same dynamic play out across the board due to the uncertain macro. Thanks for the question.

Our next question will come from Siti Panigrahi with Mizuho. Please go ahead.

Hey. Thanks for taking my questions. I just want to dig a little bit into the macro question, especially you talked about slowdown. Did you see towards the end of the quarter, that slowdown? And when I look at enterprise growth deceleration, and you talked about sales elongation, did you see any deals that got stalled and you expect that to close maybe in Q4?

Okay. So let me address both prongs of that. Generally, what we see is especially upmarket a more back-end loaded quarter. I mean that’s been historically true, and it’s remained. The elongated sales cycle, additional approvers, all the things that I just articulated certainly do play into deals that one might have expected to hit in one quarter roll into the next. That’s been true for both third quarter and second quarter, and frankly, unlikely to change, and it’s something that we factor in as we have got for fourth quarter and something we will factor in as we go into 2023 as well. Okay. Thank you very much. Next question?

Our next question will come from Matt Niknam with Deutsche Bank. Please go ahead.

Thank you for taking my question. We discussed Avaya earlier, and I'm curious about the partnership with NICE. Can you provide any updates on its performance? Are you seeing more success with cross-selling at the lower or upper end of the market? Additionally, Sonalee mentioned this, but although we are a few years away, do you have any initial thoughts on how you plan to address the upcoming $1.65 billion in maturities for 2025 and 2026, considering the current interest rates? Thank you.

Okay. I will take the NICE question and then turn it over to Sonalee. First and foremost, I will say, we are seeing continued success in attaching contact center to our largest deals. And as part of the prepared remarks, we talked about continuing to see 60% plus of our largest deals, having contact center attached, and I really think that speaks to two things. One is the pretty amazing integrations that we built as part of our UCaaS, CCaaS platform, as well as the buying behavior that we are seeing in the market where more and more especially mid-market and up customers want to buy these two products together, because it allows for a much improved end customer experience and employee experience by allowing integration of both customer-facing employees and the ability to seamlessly transition customers to back-office employees think of it as a contact center-like technology, if you will. And not really the power of the integrations that we have built and why we are continuing to see strong wins there. So with that, let me turn it over to Sonalee to talk about the second part of the question.

Thank you, Mo. Thank you for the question, Matt. Certainly, managing capital structure is always a priority for a CFO. Regarding the convertible notes, as you mentioned, the first one is due in March 2025, and the second in March 2026. If you consider the financial profile we've presented today, especially with the expected expansion of our operating margin, we anticipate growth in free cash flow as well. This will enhance our options for funding the business in the future, indicating a strengthening financial profile. I am quite pleased with the convertible notes since they carry zero percent interest, and I believe our flexibility in handling them will only improve moving forward. Thank you for your question.

Our next question will come from Tim Horan with Oppenheimer. Please go ahead.

Thanks, guys. Can you talk about the overall competitive and pricing environment? Are you seeing Microsoft or Zoom or anyone else getting more aggressive or less aggressive? Thanks.

Well, thanks for the question, Tim. This is Mo. What I will tell you is, as we said in our prepared remarks, we are continuing to see overall ARPU staying strong and steady over $30. This has been a very consistent metric that we have given for three quarters in a row now, and I think something that speaks to the resilience of this product set in the marketplace. To the second half of your question, I articulated that our win rates have remained steady and strong as well. So when you think about those two things together, what I would tell you is, broadly, no, we are not seeing any elevated levels of competition that are resulting in deal loss or ARPU degradation. Thanks for the question.

Our next question will come from Brian Peterson with Raymond James. Please go ahead.

Thanks for taking the question and I appreciate all the commentary, especially about into 2023. Mo, I just wanted to double-click on what your comments were. I know you are not alone in seeing sales cycles expand. I’d love if you could open up on that maybe a little bit more in terms of is that more on the net new side or has the expand motion with your enterprise customer base, has that slowed down a bit as well? Thanks, guys.

Good question. What I will tell you is that this modulates a bit quarter-to-quarter. But essentially, approximately 60% of our new bookings come from acquisition and approximately 40% comes from net upsell. We are generally seeing those two things move together with no meaningful change over the last few quarters. And so as you think about the trends that I articulated, they are playing out across the board, whether it’s a new shift from on-prem to cloud or as people are thinking about spending incremental dollars expanding what they have today. Thanks for your question.

Our last question will come from Matt Stotler with William Blair. Please go ahead.

Hey, team. Thank you for taking the question. We get a lot of inbound from investors on your stock-based compensation as a percentage of revenue. It had increased there for some time into the well into the 20s and it seems to actually be coming down over the last several quarters. I would love to just get an update on how you are thinking about plans to continue reducing that and then where ultimately you would like that to kind of settle out in terms of percentage of revenue?

Thanks. I will start and Mo may want to add a comment or two. But you are absolutely right, it is something that we have been focused on, and if you think about where we are guiding for full year 2022, you should see about a 400 basis point improvement in stock-based comp as a percentage of revenue. And the reason that the spend was elevated is partly by virtue of when we gave out those grants, it was at a much higher stock price. It is something that we manage and evaluate as a management team. And what I would say is, it will continue to be one of the levers we use to incentivize our employees. We think it’s really important for our employees to be aligned with all of the shareholders, and so it is something that we continue to use. But you should expect that number as a percentage of revenues over time to stabilize. You won’t see as strong an improvement as you saw this year. We made a big step change. But over time, that should stabilize. And then, secondly, just in terms of SBC, the flip side of that is, we also use buybacks at times, and you saw this quarter in my prepared remarks that we did $20 million of buybacks this quarter, and that helps to offset the dilution as well. So I don’t know if you have anything to add, Mo.

No. I think you nailed it. I mean, coming into the year, we guided to about 200 basis points of improvement. We expect to be exiting the year closer to 400 basis points, which shows this line that we have enacted. And to the second half of your question, I do expect that to continue trending down over time. We have taken some operational actions this year, while continuing to use SBC as a key retention and compensation tool. We have been able to take actions that over the next several years as new stock backs, I would expect that to continue trending down into the teens range. And then to Sonalee’s point, stabilize at, call it BAU SaaS levels then. Thanks again for all of the questions. Turning back over to the Operator.

Thank you. This concludes our question-and-answer session, which also concludes our conference for today. Thank you for attending today’s presentation. You may now disconnect.