RingCentral, Inc. Q2 FY2023 Earnings Call

Good afternoon and welcome to the RingCentral Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Will Wong, Vice President, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to RingCentral’s second quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Tarek Robbiati, incoming CEO; and Sonalee Parekh, CFO. Our format today will include prepared remarks by Vlad, Tarek, 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 discussion and responses to your questions will contain forward-looking statements regarding the company’s business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control and are not guarantees of future performance. Actual results may differ materially from our forward-looking statements, and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission as well as today’s earnings release. 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. 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.

Good afternoon, and thank you for joining our second quarter earnings conference call. This has been a busy quarter for RingCentral. I know you’ve likely seen the exciting news that Tarek Robbiati has been appointed as RingCentral’s next CEO, effective August 28. I will be transitioning to Executive Chairman on that date. I’d like to extend a warm welcome to Tarek, and we’ll talk more about this later on in this call. I also want to take a moment to say a few words about Mo Katibeh, who will be leaving the Company in the coming weeks to pursue other opportunities. Mo has played a pivotal role building out our team, evolving our product roadmap, expanding our partner ecosystem, shaping our winning culture, and driving meaningful efficiencies in the business. On behalf of myself, the Board, and the entire team, we wish Mo all the best in his future endeavors. On the corporate development side, last week, we announced the acquisition of the Events and Session product lines from Hopin, a leading provider of online audience engagement technology. Hopin Events allows users to easily set up complex virtual and hybrid events and fits well with our video strategy of delivering more personalized and engaging video meetings and event experiences for customers, all at a competitive price point. The technology from Hopin provides us with the complete video portfolio that now includes meetings, webinars, rooms, and virtual and hybrid events. I would like to welcome Hopin Events and Hopin Session’s talented teams to the RingCentral family. Now, let’s turn to the quarter. This is my 40th earnings call as the CEO of RingCentral. On our first earnings call, nearly 10 years ago, we reported $161 million in ARR. Today, this number stands at over $2.2 billion. 10 years is a long time, and I’m proud to say we have not ever missed our financial guidance during this period, and today is no exception. Q2 was another solid quarter as we continue to execute against our plan of delivering sustainable, profitable growth and continued innovation. For the second quarter, total revenue grew 11%, above the high end of our guidance range, and ARR grew 12%. Operating profit margins increased 8 percentage points versus last year to 19.4%, another quarterly record and well above our outlook. This improvement demonstrates the leverage in our model and our disciplined approach to spending. The profit improvement also translated to another quarter of record free cash flow. We’re delivering this increased profitability while also continuing to invest in innovation, which is the lifeblood of our company. RingCentral was founded and grew on the complementary megatrends of connectivity, mobility, and cloud computing. RingCentral has been an early pioneer, leveraging and contributing to all these important innovations. But now there is a new megatrend emerging that may prove to be the most impactful of all, and that is conversation intelligence. RingCentral again expects to be the beneficiary of and the contributor to this major innovation. Conversation intelligence is highly relevant for business communications as it has the potential of enhancing employee productivity, improving customer service, and positively impacting business outcomes. We saw the potential of conversation intelligence several years ago. In December 2020, we acquired DeepAffects, a conversation intelligence company, which is now the foundation of our RingSense AI platform. In March of this year, we announced our first commercial product, RingSense for Sales. Since March, we have introduced significant new updates to RingSense for Sales. And earlier today, we announced two new products, RingSense for Phone and RingCX, our new native intelligent omnichannel contact center. A few words about these products. First, RingSense for Sales. We’ve been innovating at a fast pace. We have added many features to address customer feedback and improve our competitive positioning. Some of these enhancements include: 10 integrations with leading third-party applications, such as Salesforce, HubSpot, Microsoft Dynamics, Outlook Calendar, and Gmail Calendar; Deal scoring, which makes it easier for leaders to track pipeline health and see whether deals are progressing or are at risk; AI coaching, which helps sales agents improve interactions based on AI-analyzed customer sentiment and effectiveness of their pitch; and AI-driven win/loss analysis, which provides effective selling insights from conversations to improve win/loss rates. Second, RingSense for Phone. Leveraging conversation intelligence, RingSense for Phone enables organizations to apply AI to their voice conversations and leverage deep insights to boost productivity and collaborate more efficiently. A few key highlights include: live transcription and closed captioning; and post-call summaries, insights, and sentiment analysis. RingCentral is hosting billions of minutes of voice traffic for many millions of users. RingSense for Phone will allow them to be more effective on live calls as well as gain important insights via post-call analysis. Together, we believe it will lead to more efficient and productive conversations so as to drive improved business outcomes. Last but not least, RingCX. We have seen great success selling RingCentral MVP with RingCentral Contact Center that is powered by NICE inContact. With our CCaaS business that is now well in excess of $300 million of ARR, we have conclusively proven the case for UCaaS and CCaaS integration. Our joint solution with NICE inContact is well differentiated as it integrates our respective Magic Quadrant-leading products into a unified offering from a single provider. We continue to invest in this partnership and see significant continued potential. However, in listening to our customers, we’ve recognized an additional need for a native intelligent contact center solution that would also be better suited to simpler use cases. That is why we are now introducing RingCX. RingCX is a powerful product that offers a native integrated 20+ omnichannel experience for agents and administrators. It also includes AI-powered transcripts, summaries, and conversational insights as well as workforce engagement management via an OEM partner integration. We believe RingCX will also be well received because of its ease of use, ability to be quickly deployed, and its disruptive pricing. RingSense for Sales, RingSense for Phone, and RingCX are all currently in controlled availability with expected general availability by the end of this year. It is early, but we’re getting good initial feedback. In summary, it was another solid quarter, highlighted by our strong innovation and operational execution. Now back to the CEO succession. When I founded RingCentral over two decades ago, we were a tiny, unfunded startup with an ambitious mission to improve how businesses around the world communicate internally and with their customers. From those humble beginnings, we have become a recognized leader in our space and one of the largest pure-play SaaS companies in the world. September 2023 marks the 10th anniversary of our IPO. Given the strong position we’re in today, operationally and financially, I believe this is the right time for a CEO succession. And Tarek is the right person for the job. Tarek is a highly accomplished senior business leader. He has been a key member of our Board since January, which has given him an opportunity to get to know our business, our team, and our culture. I believe Tarek is in a unique position to hit the ground running on day one. As for myself, my plan is to stay actively engaged in the business, focusing on what I love most: strategy, innovation, and product development. I’m incredibly proud of what we have accomplished together and am energized about the future. With this, I will now turn the call over to Tarek for some additional remarks.

Thank you, Vlad. I consider it a distinct privilege to be RingCentral’s second ever CEO. And on behalf of the Board, let me express our immense gratitude for all you have built. You took this company from an idea to a multibillion-dollar global enterprise serving approximately 6 million paying end users and bringing together an expansive 15,000 partner ecosystem. I believe our potential is vast, and we have an enduring foundation on which to build our future. Vlad and I are aligned on RingCentral’s core principles: people and customers first, an ever-present drive for innovation, and a commitment to delivering results for all our stakeholders. These will continue to be cornerstones of our operations as we drive greater performance and profitability through the focused execution of our strategic initiatives. And importantly, on behalf of the Board and from me personally, I would like to thank Mo for the contributions that he has made during his tenure and wish him the best of luck. Now, let me turn the call over to Sonalee to go over the quarter in more detail.

Thank you, Vlad. I’m very much looking forward to continuing our partnership in your new role. Tarek, I’m equally excited to be working with you again. I’d also like to thank Mo for his valued contributions and partnership and wish him the best of luck going forward. I’ll now provide highlights from the second quarter and then discuss our business outlook for the third quarter and full year. Subscriptions revenue of $514 million was up 11% year-over-year and above our guidance range. ARR was 12% versus last year to $2.22 billion. Growth was driven by strength within key industry verticals where our products are mission-critical, such as professional and financial services, healthcare, retail, and the public sector. Additionally, contact center ARR was roughly $330 million, up from roughly $300 million at the end of 2022. The strong traction we are seeing in contact center is driven by continued demand from customers for a leading integrated UCaaS plus CCaaS solution. An example of the power of our platform is our recent competitive win with Republic Airways, one of the largest regional airlines in the U.S. The company’s legacy tools required frequent maintenance. Their on-prem phone system also did not integrate well into their contact center, which Republic Airways relies on to quickly reach its pilots and flight attendants to provide them with any urgent scheduling changes. RingCentral’s industry-leading reliability for the past 20 quarters, advanced call routing and integrated cloud contact center will help Republic Airways solve these challenges, all while saving money. Importantly, Republic Airways plans to utilize our new RingCentral for Teams 2.0 Embedded App, which continues to see great traction in the marketplace. Moving to profitability. I will be referring to non-GAAP results unless otherwise noted. Our subscription gross margin was 82%, consistent with last quarter. Overall ARPU was again above $30 as customers continue to value our differentiated offerings. Our solid ARPU supports our strong gross margin. Operating margin rose 800 basis points versus last year to 19.4%, another quarterly record. The increase was driven by operating leverage and efficiencies generated across the business, most notably in sales and marketing, which was down 490 basis points versus last year. Sales and marketing expense improved due to the efficacy of our marketing spend as well as the headcount actions we took last November. As a reminder, those actions did not impact customer-facing salespeople. Our increasing profitability translated into record quarterly free cash flow of $81 million on an adjusted unlevered basis. The improvements to our free cash flow continue to be driven by operating leverage, efficiencies throughout the business, and improving our free cash flow conversion. Our robust free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and addressing our convertible debt maturity. This quarter, we were able to execute against all three of these vectors. First, during the second quarter, we paid $427 million to repurchase $461 million in aggregate principal amount of our 2025 convertible notes. The repurchase was funded with cash on hand and $400 million from our Term Loan A. We also entered into a swap agreement that fixed the floating interest rate on our Term Loan A. The fixed interest on our Term Loan A is approximately 6.6% and can step down modestly as we further deleverage. This results in a weighted cost of debt of approximately 1.6% following the repurchase. Based on our second quarter results, our trailing 12-month net leverage ratio is 3.3 times. And based on our 2023 outlook, we continue to expect our net leverage to be less than 3 times as we exit the year. Second, in the quarter, we repurchased approximately $100 million of shares at an average price of approximately $30. Additionally, during the second quarter, our Board approved a new share repurchase authorization for $125 million, effective through December 31, 2023. Lastly, as Vlad mentioned, last week, we acquired assets from Hopin to augment our video offering. While we are excited about the addition, we expect the acquisition to have an immaterial impact on our revenue and expenses in 2023. Before I provide our third quarter and full year guidance, I’d like to provide you with additional details on the macro trends we are seeing in the market today. Macro trends are largely consistent with last quarter. Sales cycles remain elevated versus last year and customer buying decisions continue to go through additional layers of approval. We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee count. Importantly, marketing driven lead flow remains consistently strong, demonstrating continued demand for on-prem to cloud conversion. Now turning to guidance. For the third quarter of 2023, we expect subscriptions revenue growth of 9% to 10%; total revenue growth of 8% to 9%; non-GAAP operating margin of 18% to 18.5%; and non-GAAP EPS of $0.75 to $0.78. Note that we are reinvesting a portion of the operating profit outperformance we delivered in the second quarter into innovation and go-to-market activities in the third quarter. Specifically, there are areas of strength in select verticals where investments, including in AI, are expected to drive greater product differentiation and incremental demand. Now moving to the full year 2023. We continue to expect subscriptions revenue growth of 11% and total revenue growth of 10% to 11%. And we now expect non-GAAP operating margin of 18.5% to 19%. At the midpoint, this is up more than 600 basis points versus last year and 25 basis points above our prior outlook. And non-GAAP EPS of $3.11 to $3.25. Note that this outlook is inclusive of interest expense from our Term Loan A, which our prior outlook of $3.19 to $3.25 did not include. Additionally, last quarter, we noted that we would be able to achieve $280 million in free cash flow, much earlier than our original target of 2024. I’m pleased to share that we now expect to achieve adjusted unlevered free cash flow of $270 million to $290 million in 2023, roughly a full year earlier than we had originally expected. We are well on our way as we have already generated $142 million in the first six months of 2023. Our updated target demonstrates the power of the operating leverage inherent in our business. It also speaks to the progress we are making on our efficiency initiatives, all while continuing to invest in innovation and targeted go-to-market activity. In summary, Q2 again demonstrated our ability to execute against our strategy of driving profitable, healthy growth with robust free cash flow generation. We believe our leading differentiated product offering and focus on innovation, coupled with our scale and attractive business model, positions us well for continued success. With that, let’s open the call for questions.

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

Great. Thanks. Vlad, it's unfortunate to see you stepping down after such a long time. I've really enjoyed working with you. Regarding Tarek, who has been on the Board, could you share why you think he was the right choice? What will your ongoing involvement with the Company look like, and why choose someone from outside the traditional software sectors? Thanks.

Hi, Meta. Firstly, I’m not quite stepping aside; I’m transitioning to an Executive Chair role. I plan to remain actively involved, though less on the governance side. Tarek will be the actual CEO, no questions about it. However, I’ll be present and working on innovation, product launches, long-term vision, and strategy. By the way, Tarek is here with us and can answer some questions directly. I believe I can speak for both of us when I say we view this as a partnership moving forward, which we've discussed in detail. I also want to point out that Tarek has been on the Board since December of last year and has been actively involved as a member of our audit and compensation committees. He understands the company very well. It was crucial for me and the Board to ensure a smooth transition with someone who knows the business, understands the landscape, and importantly, shares our values and our strategy of profitable growth. So both aspects — being profitable and growing — are very important, and Tarek has a strong track record in both areas. In response to your question about why not choose someone from the software industry, Tarek does come from the software industry and has achieved significant accomplishments at HPE and before that. Additionally, Sonalee, our CFO, has worked with Tarek for many years and may have some insights to share.

Yes, I’ve known Tarek for over 25 years and had the pleasure of working directly with him at HPE, where he did an excellent job of transitioning the portfolio towards higher growth areas like Aruba. He was a strong advocate for investing at the Edge, which led to significant growth, even though HPE has a much larger revenue base, making it less apparent in the overall figures. The Aruba business experienced considerable growth, and he played a key role in the GreenLake and as-a-service transition, as well as in the high-performance computing and AI divisions, all of which outperformed the overall portfolio. Tarek brings extensive experience and a solid track record as both a CEO and CFO, having effectively scaled businesses while driving growth, profitability, and cash flow. We believe he is exceptionally well-rounded.

The next question is from Terry Tillman with Truist Securities.

Yes. I mean I have a question, but I do want to ask an extra and I think I should be able to. Vlad, are you still going to be on these calls answering our provocative questions? And then I will ask my question.

Look, I want to reiterate, Tarek is going to be the CEO. But I would say as appropriate, if Tarek wants me to participate, maybe on a case-by-case basis, look, I’m around. I’m not sailing into the sunset. I still have immense interest, not just financial, but also financial in this company’s success. And as you know me, I tend to speak my mind, for better or worse. So I don’t think that that’s going to stop anytime soon.

Congrats to you both. My question for the call is actually, Sonalee, I think in the past, you talked about ARR bookings, how that would trend ahead of top line growth. We only have two quarters left, and I don’t know what kind of visibility you have in the second half. But could you give us an update on how you’re thinking about ARR bookings for the year and the growth rate there? Thank you.

Yes, Terry. We generally don’t provide guidance on ARR. However, we have good visibility for the second half of the year, which is why we reiterated our full year guidance today and raised our guidance on operating margin, in addition to offering more insight on free cash flow. In terms of ARR, we achieved about $60 million in bookings for the quarter, resulting in approximately $120 million of net new ARR bookings in the first half of 2023. Historically, our business has been somewhat more weighted towards the second half, so if typical seasonality persists, we believe that our targets are achievable. Although you didn’t specifically ask about guidance, we are reiterating our full year estimates for both revenue and subscription revenue. We significantly outperformed the second quarter outlook by around 200 basis points, marking an improvement of 800 basis points year-over-year compared to the same quarter last year. Consequently, we have raised the midpoint of our margin guidance by 25 basis points, and we are now targeting margins of 18.5% to 19% for the full year, with expectations to close the year at or above 20%. We will continue to strive for even better results.

The next question is from Samad Samana with Jefferies. Please go ahead.

It has been a pleasure working with you, Vlad, and I look forward to staying in touch. Regarding the CCaaS side of the business, could you elaborate on where the new product fits into the market? Do you consider this a greenfield opportunity, or are you aiming for replacements? If it's the latter, who are you targeting with that product? I also have a follow-up question about CCaaS ARR.

Thank you, Samad. Regarding RingCX, we have a CCaaS business that exceeds $300 million in annual recurring revenue, positioning us among the largest CCaaS providers globally. What sets us apart is our strong performance in the unified UCaaS and CCaaS communications market, particularly through our unique integration with NICE inContact. This has been significantly beneficial for us. As for the new opportunity, until now, we haven't seen many pure-play requests specifically for contact centers. Typically, those looking for just a contact center might not have considered us for their RFPs. With RingCX, we anticipate being more directly involved in those opportunities. NICE inContact is indeed a leading product recognized by Gartner, but it's an enterprise-grade solution characterized by complexity and higher pricing. This presents us with an opportunity to target not just smaller businesses but also larger organizations with simpler needs. We believe RingCX can effectively compete based on features, being AI-driven and built on advanced cloud architecture. Our pricing will be competitive, if not disruptive. Many have inquired about our own contact center, and I'm pleased to share that we are currently in beta. Initial results have exceeded expectations, and the feedback has been overwhelmingly positive. We are actively learning from this feedback and making necessary adjustments. With more time to focus on operational details like product launches, we expect RingCX to become a strong contender in the market.

And if I could just add something there. You can just imagine that with proprietary economics, the contribution margin on RingCX will be much higher than what we drive today on RC CC.

Understood. I have a quick question about the CCaaS and the ARR disclosure of over $300 million you mentioned, which suggests significant growth, correct? It appears to be over 30%. I want to confirm if that calculation is accurate. Additionally, for UCaaS, it seems to indicate more of a high single-digit growth rate. Is that the correct way to interpret the growth rates for both moving forward?

Yes. I’d like to highlight a couple of points. We are very pleased with the growth of our CCaaS business. In our last update, we mentioned that we would provide updates every other quarter, and this quarter I'm happy to share that we have reached $330 million in ARR. We have had significant success in selling RingCentral MVP alongside RingCentral Contact Center, with over 60% of our large deals exceeding $1 million in TCV including both UCaaS and CCaaS. We are uniquely positioned compared to our competitors in offering both UCaaS and CCaaS from a single vendor, which we believe is particularly appealing to enterprise customers. Regarding our UCaaS business, we are still growing well above market expectations in terms of revenue market share. Third-party data from companies like Synergy and Gartner shows that we continue to gain revenue share in this area. In summary, CCaaS is growing significantly faster than the market, and UCaaS is also capturing more revenue share relative to the overall market.

The next question is from Brian Peterson with Raymond James.

Congrats to Vlad and Tarek. But Sonalee, I wanted to follow up with you. You mentioned that on some of the efficiencies that you’ve recognized you’re going to be reinvesting in the third quarter. I’d love to understand how much of that is more product-oriented versus go-to-market-oriented? And how should we be thinking about potential efficiencies going forward, should those be reinvested as well? Thank you.

Yes, that's a great question. As I mentioned earlier, we significantly surpassed our Q2 profit margin expectations, achieving a beat of around 200 basis points, bringing us to 19.4%. However, we still need to invest in the business. We're noticing strengths in certain sectors where investments, particularly in AI, are anticipated to enhance product differentiation and stimulate additional demand. In Q3, we plan to focus our investments in these promising areas. This will also involve spending on high-performing marketing channels that we believe will generate more sales. Overall, the full-year margin outlook remains positive, but we aim to balance growth investments with profitability. As we've indicated in previous calls, upselling has posed some challenges for us, but we believe the new products we are launching will warrant investment and will help drive the upsell efforts we expect to see as the macro environment improves.

The next question is from Kash Rangan with Goldman Sachs. Please go ahead.

First of all, Vlad, congratulations on a decade as CEO of a public company. Also, congratulations on bringing in a former equity analyst from Lehman Brothers as your CEO; the future of our industry seems very promising. That said, I would like to ask Tarek a question, if that’s alright. It's impressive that you speak six languages; perhaps one day over a beer, you can share how you accomplished that. I'm curious to hear your insights on what you've learned about the company that gives you the confidence to take on this role and answer questions from us. I look forward to collaborating with you. Additionally, with your extensive background as an equity analyst and in the tech industry, what do you identify as RingCentral's main challenge moving forward? What unique expertise do you plan to apply, whether it involves targeting a new market segment or pursuing acquisitions? I'm aware there are challenges ahead, so how do you plan to navigate them? Thank you, and congratulations once more.

Well, thank you very much for the intro. You made me feel a bit younger because when I was an equity analyst, it was 25 years ago, and we were with the same team with Sonalee. So, thanks for reminding me of this. Let me answer first by saying I see a tremendous opportunity at RingCentral and a vast potential. The opportunity that exists in UCaaS and CCaaS combined that Vlad has mentioned is quite formidable. And it’s something that I’m very keen on capitalizing on for the future and realizing that full potential. Those use cases that you’ve heard about from Frontier Airlines are very telling. These are use cases where communications become more pervasive all the way from inside the office with a contact center, all the way on to field workforces or sales forces, any way you want to look at them. These are unique use cases that RingCentral can pursue, and I’m very keen on making sure that we continue at RingCentral to innovate and to grow. Because the practical reality is that in this industry, the very first lever for value creation is growth, and we intend to continue to develop the growth here for all our stakeholders and obviously our shareholders. What stands in the way, to be honest, it’s a bit early for me to say what stands in the way. It’s true that I have the vantage point of having spent 9 months on the Board of Ring. And I think I know it somewhat. But I have to spend more time under the hood, so to speak, really in the operations of the business to figure out what stands in the way. And I will start doing so immediately upon my first full-time day on the 28th of August. But between now and then, we’re not going to be waiting. I’m going to be spending some time with the management team, making sure I understand where they’re coming from, so that we can have a real solid operation moving forward.

The next question is from George Sutton with Craig Hallum. Please go ahead.

Thank you. My congrats to Vlad and welcome to Tarek. I am curious, Sonalee, you had mentioned that marketing-driven lead flow had been really the strength in this quarter. I was just as interested that there was no mention of the large partnerships, the Avayas and Mitels and Frontiers and AT&Ts of the world. Can you just give us an update on the partnership side of the business?

Yes, certainly. You mentioned Avaya and Mitel specifically. We also have AWS, and I'll touch on the global service providers as well. Avaya has recently emerged from bankruptcy and is continuing to implement its new go-to-market strategies established under our updated contract. We have observed slightly improved performance from Avaya this quarter. As I mentioned earlier, we still expect a more significant impact from Avaya to come later in the year. Mitel is also adding new seats at a healthy rate. Regarding AWS, it's still early, but we've begun to see encouraging progress in the pipeline, with our first deals starting to close. We are on track to be active on the AWS Marketplace later this year. Concerning the global service providers, one notable example is Charter, where we are witnessing exceptionally strong performance. Additional GSPs have recently come online, particularly in Europe, and we are gaining more traction with Vodafone as well. Our legacy partners are fully operational and continue to contribute, but it's also crucial that we are starting to see substantial results from these new partners. Overall, partnerships are an integral part of our go-to-market strategy, and we anticipate that all these partners will continue to drive growth for the remainder of this year and beyond.

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

Vlad, it's unfortunate to see you leave, but we will remain in touch. I'm looking forward to our future conversations. Tarek, congratulations on your new role. I have a question regarding a specific region. There have been several press releases this quarter related to India, including topics like regulatory compliance, new office openings, and hiring at plants. I would like to discuss the opportunities you see in that area and how they might integrate into the business over time. Additionally, how do you view the competitive landscape there compared to other parts of the world?

Thank you. As for India, we believe we are the first foreign service provider permitted to offer these services in the region, which is a significant achievement. Our initial focus will be to integrate India into our global office technology. This means that for businesses based in the U.S. or other international locations with offices in India, we can provide a local dial tone legally. This is where we are noticing the greatest demand currently. Additionally, we have a robust and expanding GSP practice, and with this development, we are now more equipped to partner with local service providers to enhance their B2B offerings in the region. Finally, there is the potential for direct engagement, although that is not our immediate priority. Our first focus is on the first two points, but we see this as an opportunity. It’s important to note that India has the second-largest population globally and is the largest market where we can operate legally, especially compared to the restrictions we face in China. Therefore, it represents a significant growth area for us as we look ahead.

The next question is from Jim Fish with Piper Sandler. Please go ahead.

This is Quinton on for Jim. Vlad, we wanted to extend our congratulations and best wishes for your new role and look forward to collaborating with you, Tarek. Regarding the Microsoft Teams 2.0 opportunity, we continue to receive strong feedback from your channel partners about this product. When Microsoft mentions their 17 million PSTN users on the platform, do you believe that all 17 million represent a viable target market for the 2.0 opportunity, or are you concentrating more on the G2K players? Additionally, how do you assess the current penetration of that opportunity?

It’s quite challenging to discuss the situation when dealing with significant figures. However, looking at the current market, Microsoft is categorized into E1, E3, and E5 tiers. The E1 and E3 tiers do not include business telephony, which can be sold separately, while the E5 tier does include it but still lags behind us in terms of features and global reach. This has been a key focus for us in the last quarter, and it continues to perform well. In our earnings call, we mentioned Republic Airways, which is a Teams customer planning to utilize our embedded dialer within their standardized technology suite. I’ve repeated this before: Teams has been, and we believe will continue to be, a significant growth driver for us. We were at parity until late Q1, but I believe we’ve moved ahead now regarding the quality and user experience our integration offers. Essentially, our integration stands out as the best in the market. Importantly, we have announced new features, such as RingSense for Phone, which will also be included in the Microsoft version of our packages and made available to all our 15,000 partners, including GSPs and strategics. This will come together and strengthen our position. The remaining part is go-to-market strategy and increasing add-backs. With Tarek’s arrival and emphasis on operational excellence and efficiencies, we are optimistic about gaining more add-backs across all segments, particularly in enterprise.

The next question is from Siti Panigrahi with Mizuho Securities. Please go ahead.

I also want to wish Vlad and Tarek the best. Tarek, I’m looking forward to working with you. I would like to inquire about your growth at this stage. I know you have discussed various factors affecting growth. Given that Avaya is coming back from bankruptcy and that partnerships are returning, when do you expect growth to reach its lowest point? Additionally, what are the key drivers you believe will contribute to the products you mentioned, and when do you think we will see growth start to accelerate again?

Yes, we’ve provided our guidance, and this may not be the ideal moment to make predictions about the future. You'll need to wait for our guidance after the current quarter and our outlook for next year and beyond. However, for the first time in a long while, RingCentral has truly become a multi-product company with a comprehensive range of offerings catering to employees and customers alike. This past quarter, we enhanced our video portfolio by acquiring assets from Hopin, which has made a significant mark in the virtual and hybrid events industry, attracting high-profile clients and receiving positive feedback on their products. We are pleased to have added this to our suite, giving us video meetings, rooms, webinars, and event capabilities that extend beyond just virtual formats. As COVID fades, purely virtual events may become less appealing, and hybrid events are gaining traction, which is an area we continue to invest in. This enriches our product portfolio and provides a competitive edge, especially since Microsoft lacks a similar events product. We find that when customers experience our offerings, they tend to remain loyal, allowing us to build valuable relationships and expand within accounts. On the RingCX front, we now have our own contact center solution, both stand-alone and integrated, which we believe will disrupt the market in terms of features, positioning, pricing, and overall value. Additionally, we see a significant opportunity in AI. Recently, we learned that Zoom updated their terms to use customer data for training, unlike us. We aim to train our systems using customer-specific data to improve their experience without mixing data. Given our extensive network and the millions of customers we serve, we can introduce intelligence into all our interactions, marking a substantial advancement for us. Overall, while we aren't altering our guidance, we believe we are in a strong position with a differentiated product offering more than we've seen in recent years. The team is motivated; Mo has done a commendable job stabilizing things over the past 18 months, and with Tarek's arrival, we're excited about the new ideas and strategies he will contribute. We're committed to delivering strong results moving forward.

The next question is from Ryan Koontz with Needham.

I wanted to follow up on the AI capabilities. It sounds like you’ve got a great team there from DeepAffects. How do you think about the infrastructure requirements for that in-house versus building your own versus public cloud partners? Can you talk a little bit about that? And how that can affect the model going forward on cash flow, etc.?

We operate entirely in the public cloud with no infrastructure. It's a brief answer, but everything is public and has high margins.

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