RingCentral, Inc. Q4 FY2023 Earnings Call

Good afternoon and welcome to the RingCentral Fourth 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 of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to RingCentral's fourth quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; and Sonalee Parekh, CFO. Our format today will include prepared remarks by Vlad 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 now turn the call over to Tarek.

Good afternoon and welcome to our fourth quarter 2023 earnings call. First, I'd like to welcome two new Board members, Ned Segal and Prat Bhatt, to the RingCentral family. Ned is a seasoned executive with more than 25 years of technology, finance, and capital markets experience including at Twitter, Intuit, and Goldman Sachs. Prat is an accomplished technology industry veteran and financial expert, having served as the Chief Accounting Officer at Cisco Systems for over twenty years. I look forward to working with them both. I also want to warmly thank Allan Thygesen for his nine years of service on our Board, as he will be transitioning off the Board in Q2. Now, moving to our results. We ended the year on a strong note. In Q4, total revenue rose 9%, above the midpoint of our guidance. ARR rose 11% to $2.3 billion. We also achieved record profitability, with quarterly operating margin of 20.5% and free cash flow of nearly $100 million, well above our outlook. Our strong finish to 2023 positions us well to execute on our strategy in 2024 and beyond. I returned as CEO to deliver on our strategy of; one, delivering durable growth and value from our core; two, expanding our total addressable market by turning RingCentral into a multi-product, AI-first communications leader. To that end, we have recently added three new products to our portfolio; RingCX, our native, AI-first contact center, RingSense for Sales, our conversation intelligence platform for sales professionals, and RingCentral Events, our new virtual, hybrid, and onsite events platform. And three, driving continued robust free cash flow generation, while materially reducing stock-based compensation, and maximizing free cash flow per share growth over the long-term. Our right to win is rooted in our industry-leading, reliable, global, fully-featured business communication platform that now includes cloud PBX, cloud contact center, and video meetings, webinars, and events, all infused with state-of-the-art AI capabilities. As a testament to our industry leadership, in November 2023, RingCentral was named a Leader in the Gartner Magic Quadrant for Unified Communications as a Service Worldwide Report for the ninth consecutive year. And we are excited to report that Aragon Research, an independent third-party research firm, just named RingCX as a leader in the Intelligent Contact Center for SMB. We believe this is a testament to RingCentral's ability to continue delivering a superior, differentiated solution in a competitive market. We are proud to have built a $2.3 billion recurring revenue business that is growing, profitable, and serves over 400,000 customers across enterprise, mid-market, and SMB. Within enterprise, which we define as customers that generate $100,000 in ARR or more, I am particularly proud to report that this segment has just achieved $1 billion of ARR. This is a major milestone for our company. In fact, in this post-COVID world, enterprise continues to be a strong growth driver for us. Today, we count almost 20% of Fortune 1000 companies as our enterprise customers. Among these are two of the world's three largest hotel brands, one of the world's largest car rental companies, and many leading Fortune 500 financial services companies. Notably, the majority of our enterprise customers utilize our solutions integrated with and alongside Microsoft Teams. This strong presence with large customers and within the Microsoft Teams environment is a testament to the trust our enterprise customers have in our products and our ability to add value to the Teams environment. Our new, advanced integration with Microsoft Teams is a key reason enterprise customers select RingCentral. This includes customers such as Republic Airways, one of the largest regional airlines in the US. Overall, enterprise continues to be a growth driver for RingCentral, with a positive long-term outlook. Let me now share some additional highlights of why customers large and small continue to choose RingCentral to power their communications. Broadly speaking, customers have historically picked us because of our 99.999% reliability, which we achieved for the 22nd straight quarter, robust feature set, regulatory compliance, and depth and breadth of our integrations. Here are some examples of key large wins and expansions for this quarter. One, a Fortune 100 insurance provider that purchased 20,000 UCaaS seats to connect its distributed broker network made up of thousands of field offices. Another is a Global 500 retailer that purchased 18,000 UCaaS seats to power communications across its more than 2,000 stores. And finally, a Fortune 500 global healthcare solutions company that added millions of dollars to their existing contract. One of the key integrations for this customer is our reliable and powerful calling capabilities embedded in Microsoft Teams, which they have already deployed to their employees. Their additional spend is a testament to their confidence in our ability to deliver a full communications platform and add value to the Teams environment. Leveraging our core strengths, we are now expanding into adjacencies such as CCaaS, hybrid and virtual events, and conversational intelligence for sales. These categories have addressable markets that more than double our current opportunity to over $70 billion, providing multiple vectors for us to drive long-term, profitable growth. Industry analysts and customers alike are already recognizing our ability to deliver in one of our key adjacencies, namely CCaaS. In their latest report, Aragon Research praised RingCX's ability to deliver powerful AI functionality, which includes automated quality management, coaching, and conversation analytics, while being easy to deploy, easy to use, and easy to maintain, and all at a disruptive price point. Regarding customers, we now have over 100 paying RingCX accounts, up from about 50 when we launched in November. These accounts include two Fortune 1000 enterprises that each purchased over 1,000 seats. We also now have hundreds of paying RingSense for Sales customers after having just launched in the second half of 2023. Lastly, approximately six months ago we acquired Hopin's events business. We are happy with this acquisition and view it as a key addition to our portfolio. Since re-launching as RingCentral Events, hundreds of customers have hosted virtual and hybrid events on this platform in the past few months. This includes many large Fortune 500 companies and well-known businesses such as Spotify, Reddit, and HubSpot. We continue to see strong demand for our Events platform. With recent improvements in packaging and pricing and the addition of AI-powered features for Events, we expect to significantly scale this business over time. Notably, we recently won Harvard University over a well-known video-first competitor. Harvard chose us because of our advanced branding capabilities, level of production, and superior attendee user experience. While it is still early for our new products, given the level of traction we are already seeing, we believe we can achieve at least $100 million in ARR from RingCX, RingSense, and RingCentral Events, collectively, by the end of 2025. We expect these new products to be meaningful contributors to our strategy of delivering long-term, profitable growth. Importantly, going forward, our multi-product strategy will be augmented by taking an AI-first approach to everything we do. AI is revolutionizing the way the world works and communicates. The pace of AI innovation in our industry is accelerating. We have a robust roadmap of new AI-based features that should help differentiate our core and new products from the competition. Over the course of this year, we are planning to announce many more AI-rooted innovations that will enhance both employee and customer experiences. Stay tuned for some exciting product and innovation announcements at Enterprise Connect at the end of March. We will leverage our broad go-to-market capabilities as we execute on our AI-first, multi-product strategy. In that vein, I am pleased to welcome Brightspeed, formerly known as CenturyLink, who will join other valuable members of our global service provider family that now includes AT&T, BT, Charter Communications, Telus, and Vodafone, amongst others. Speaking of Vodafone. We started with Vodafone UK and Germany, and in 2023, we expanded with Vodafone into Italy, Portugal, and Spain. And we are excited about a recent enterprise win with Vodafone, landing a 15,000-seat deal at Ikea, Germany. And last but certainly not least, profitability. We have greatly expanded our profitability, with operating margins improving from 12% in 2022 to over 20% exiting 2023. We also more than doubled our adjusted, unlevered free cash flow to $325 million for the year. We continue to expect to drive further margin expansion and robust free cash flow generation in 2024 and beyond. Another important factor in creating shareholder value is minimizing stock-based compensation. I, and our entire senior management team and the Board, are laser-focused and committed to delivering meaningful improvement in 2024 and beyond. Sonalee will provide more color shortly. In closing, we exited 2023 as a stronger, leaner, more profitable business, and we're well on our way to becoming an AI-first, multi-product portfolio company. Our opportunity is large, our strategy is clear, and we are heads down executing. I am optimistic about our future and am happy to be back at the helm leading RingCentral's next chapter. With that, thank you and let me turn the call over to Sonalee.

Thanks Vlad. I'll now provide highlights from the fourth quarter and full year 2023, and then discuss our guidance for 2024. In Q4, subscription revenue of $547 million was up 9% year-over-year, above the midpoint of our guidance range. ARR of $2.33 billion was up 11% versus last year. Our enterprise ARR grew 13% versus last year to $1 billion. We saw good traction in our $1 million plus TCV deals. We finished with a seasonally strong Q4, resulting in over 100 large deals for the year. Within SMB, ARR rose 9% versus last year, and mid-market ARR grew 10%, and we believe the demand environment has begun to stabilize. Moving to CCaaS. Once again, we saw more than 60% of our large, million dollar plus TCV deals include both UCaaS and CCaaS. CCaaS ARR now represents over $350 million of our total ARR base. Now, moving to profitability. I'll be referring to non-GAAP results, unless otherwise noted. Subscription gross margin was 82%, consistent with prior quarters. Overall ARPU was again above $30. Additionally, we are seeing good traction with our new products. We have already sold thousands of RingCX and RingSense for Sales seats at ARPUs that are higher than our corporate average, and expect new products to be accretive to ARPU and retention over time. Operating margin of 20.5%, above our guidance for 20.0%, rose 650 basis points versus last year. Our focus on increased efficiency and productivity and the significant operating leverage in our business continues to drive the meaningful increase in our profitability. Importantly, we generated quarterly adjusted, unlevered free cash flow of $97 million, a quarterly record. Moving to our balance sheet. In December, we repurchased $253 million nominal value of our 2025 convertible notes for approximately $240 million. During the quarter, we also repurchased 2.1 million shares at an average price of approximately $31. Now, turning to the full year, let me share a few key takeaways. First, we delivered growth that was above the market. Second, we meaningfully transformed our profitability and free cash flow generation profile. Third, we executed against our capital allocation policy that includes debt reduction, share repurchase, and investing in innovation, both organically and inorganically. Now, let me provide some more detail about each. First, regarding growth. Total revenue of $2.2 billion was up 11%. We began to see stabilization of demand in the second half of 2023. Second, profitability. We added over $210 million of incremental subscription revenue in 2023, while keeping our operating expenses roughly flat. This was driven primarily by the reduction in sales and marketing expense, which as a percentage of total revenue declined 370 basis points versus last year, as we optimized our marketing spend, increased the productivity of our sales teams, and continued to be disciplined in compensating partners based on the value they create. This resulted in operating margins rising 670 basis points versus last year to 19.1%, and adjusted, unlevered free cash flow margins increasing from 5.2% to 14.8%. Regarding free cash flow, we generated $325 million of adjusted, unlevered free cash flow for the year, which exceeded the midpoint of our guidance by roughly $30 million. The significant increase in our free cash flow reflects our increasing profitability, as well as efforts we have undertaken to optimize upfront channel commissions and improve our working capital efficiency. Lastly, we executed against our capital allocation policy that we had previously shared. In 2023, we strengthened our balance sheet as we repurchased $839 million of our 2025 convertible notes and $41 million of our 2026 convertible notes at a meaningful discount, and we were able to reduce our gross debt by over $90 million. We exited the year at 2.6 times net debt to adjusted EBITDA, down almost two turns compared to 2022. We also repurchased roughly 10 million shares for $315 million, or approximately $31.50 per share. Our Board increased our repurchase authorization by $150 million, and we currently have $200 million remaining on our total authorization. Lastly, we acquired an events platform from Hopin, while continuing to invest in the development and launch of many new products. We accomplished a lot on the financial front in 2023. In 2024, our priorities are to one, invest in the business to drive growth. Two, expand profitability by remaining disciplined in our spend and focused on increasing efficiency and productivity. Three, significantly reducing stock-based compensation expense and net share dilution; and four, continue to deploy a capital allocation approach centered around deleveraging, share repurchase, and both organic and inorganic investments. Let me now expand on each of these priorities. First, investing in our business to drive growth. Growth in our core business remains stable, as the UCaaS market is large and continues to expand. Additionally, as Vlad noted, we expect new products to meaningfully increase our total addressable market and contribute at least $100 million of ARR by the end of 2025. Second, expanding profitability. Going forward, in 2024 and beyond, we believe we can continue to grow revenue faster than operating expenses. We will continue to focus on increasing sales and marketing efficiency. This includes increased discipline with commissions paid to sellers and channel partners and reallocating resources to where we see the highest return. Third, and very importantly, stock-based compensation. As Vlad noted, the senior management team and the Board are laser-focused on reducing stock-based compensation and dilution. We expect to reduce net new grants in 2024 by over 50% from 2023 levels. This results in total stock-based compensation coming down by approximately 350 basis points in 2024. We expect further meaningful improvement in 2025 and beyond. Finally, executing against our capital allocation priorities. Addressing our 2025 and 2026 converts is a key priority. $161 million of the 2025 converts remains outstanding at December 31st, 2023. We plan to utilize a portion of our free cash flow to retire the 2025 convert by its maturity date in March 2025. Based on our 2024 guidance and deleveraging post paydown, our net leverage ratio will trend closer to 2 times. Our low and improving leverage ratio, strong BB credit rating, and strong free cash flow growth gives us numerous options for fully addressing our 2026 converts prior to maturity. Beyond addressing our converts, we will allocate our free cash flow to investments with the highest return. This includes organic and inorganic investments and share repurchases, where we see an opportunity to take advantage of the dislocation between how the market currently values us and the inherent strength of our business. We expect these actions will drive significant growth in our adjusted, unlevered free cash flow per share of approximately 25% in 2024 and to allow us to reduce share count in the intermediate term. Now, let me turn to guidance. Embedded in our guidance is the expectation that the macro environment and current business trends remain stable, with no further improvement or deterioration in conditions. For the first quarter of 2024, we expect subscriptions revenue growth of 8% to 9%; total revenue growth of 8% to 9%; non-GAAP operating margin of 19.5%; non-GAAP EPS of $0.79 to $0.80. We also expect to incur restructuring charges of roughly $5 million to $7 million in Q1 in connection with the reallocation of resources to our new products such as RingCX and RingSense. For the full year 2024, we expect subscriptions revenue growth of 8% to 9%; total revenue growth of 8% to 9%; non-GAAP operating margin of 21%. This is up 190 bps versus 2023. Stock-based compensation as a percentage of revenue is expected to be approximately 16% at the midpoint in 2024, down from approximately 20% in 2023. We are also targeting a further meaningful improvement in stock-based compensation as a percentage of revenue in 2025 and beyond. Non-GAAP EPS of $3.50 to $3.58. Lastly, we expect an adjusted, unlevered free cash flow margin of 17.5%, or $415 to $420 million. This represents a roughly 300 bps increase versus 2023. In summary, 2023 was a year in which we delivered above-market topline growth while achieving record profitability and free cash flow. Building on the significant margin improvement we achieved in 2023, we expect operating margins and free cash flow to continue to expand, all while reducing stock-based compensation. This is reflected in the over 600 basis points combined improvement in stock-based compensation as a percentage of revenue and free cash flow margin that we have shared in our guidance. We have put in place a strong financial foundation, and I believe we are set up well to deliver on our strategy of multi-product growth and expanding margins in 2024 and beyond. With that, let's open the call for questions.

We will now begin the question-and-answer session. Our first question today is from Meta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Maybe Vlad, you could just speak to, given some of you stepping back into the CEO role, just whether there were any changes in objectives between different management that has been in the role over the last six months? And then maybe just on RingCX, clearly, you guys are seeing a lot of traction with new customers. Just any initiatives to sell that into the installed base? Or is that largely being sold to new customers today? Thanks.

Yes, hi Meta. Sure. A couple of new changes. Look, the new management, as you say, has been around for a few months. So, obviously, we're a large company and whatever momentum was carried into that period continued. But I would say that with me coming back and taking a fresh look at things, I think that you can expect a little bit more focus on technology and innovation. I think as you saw in the prepared remarks, there is renewed focus on becoming a multiproduct company and new product introduction. So, you can expect to hear the word product from me a little bit more often than maybe from the prior management here. And there is continual concentration and focus on profitability and profitable growth. So, that is not going to change. Another one is that I want to highlight that I think there was some confusion a few months ago about RingCentral retreating back into SMB. That is not what my plan is. RingCentral, our origins were indeed with SMB, but we've spent the better part of the last decade in expanding from SMB to an all-market company, including large enterprise. As you heard today, it is now a $1 billion business. It's not something that most people would walk away from, and neither am I. In particular, in the enterprise, it continues to be a growth vector for us. So, it grows faster than the company overall. And we are extremely pleased with the traction we're now getting within the Teams ecosystem. As you heard in the prepared remarks, we count 20% of Fortune 1000 companies as our enterprise customers. To be clear, this means that not only do you have 110 seats in a large company, but that these are $100,000-plus ARR deals, so these are real users and over half or I think we're saying close to 60% of it are actually Teams users. This gives me really great hope that this segment will continue to perform.

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

Hi, thanks for taking my question. Sonalee, very impressive margin expansion and cash flow generation. But if I look at your topline growth now decelerating from 11% to now high single digits in 2024. So what needs to happen? Or is there a possibility for you to get back to this double-digit growth? And what are the key assumptions or drivers for growth in this year that you embedded in your 2024 guidance? And what sort of conservatism baked into the guidance?

Yes, hi Siti. Firstly, thanks for your comments on profitability and free cash flow. And secondly, great question. I'm glad you asked it. On topline, I think it's really, really important for me to address it. We did take a deliberately conservative approach to the way we guide on revenue for this year because there is still some macro uncertainty out there. I mean, we're all seeing it. I think if you look across all the software companies that have reported up to now, and because of that uncertainty, we wanted to be prudent in the guide and what I would say is we're being very prudent. However, I do believe strongly that we can drive back to double-digit growth. This is not an operation. This is something we can realize based on the very strong building blocks we have that are in place already today. You've heard from Vlad, but I'm going to talk about new products as well. Customer and analyst feedback we're receiving from our new products gives me a lot of confidence in our ability to scale these products to at least $100 million of ARR by the end of 2025. That will have a very positive impact on our upsell, which you've heard me call out in the past has been impacted by the current macro environment. But as the macro improves, we believe these will be important tailwinds, several percentage point tailwinds to our growth. Together with the incremental growth from new products and the reacceleration from the core as a result of improved retention, we think that those are key catalysts to getting growth above the high single-digit or 9% growth that you talked about just now. In terms of margins, just one other point I want to make is that the margin expansion for 2024 that I've guided to, which is 200 basis points, would have been higher. However, we've made some investments in the business in 2024 to drive growth in new products, including around demand generation and customer and channel incentivization. Additionally, we have made a deliberate decision to shift a portion of our stock-based compensation to cash. So both of those elements together resulted in about a 200 basis point headwind to operating margin, making it less favorable than it could have been. Nevertheless, we expect to continue delivering annual margin expansion this year, next year, and beyond that due to the operating leverage in the model.

The next question is from Terry Tillman with Truist Securities. Please go ahead.

Yes, thanks for that extra color there, Sonalee. Hi Vlad, Sonalee, and Will. Just my multipart single question is just first on the $100 million target for ARR at the end of 2025. I'm just kind of curious from here to there, I mean, are we talking like $25 million or $50 million in 2024? Just trying to understand how much of a steepness we're going to need into 2025? And then the second part of this question is on enterprise ARR, even with the conservatism, should we assume comfortable above 10% or maybe even low teens enterprise ARR growth? Thank you.

So, in terms of the actual $100 million target that we've set, I mean, we will certainly look for opportunities to give you milestone updates to that. But again, just leaving on the conservatism point, we feel like that is a very achievable number. And that will be mainly driven by RingCX, which will represent the lion's share of that growth. However, we think that we will continue to deliver across all the new products that we've introduced in the last quarter or so. And I think importantly, when we thought about our guidance, we specifically decided to be very conservative on the ramp for 2024. So, expect to see much more of that to hit in the second half of 2024 and then certainly in 2025, where we anticipate a very strong contribution.

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Thanks for taking the question. Great to see the year-over-year revenue growth implied in the first quarter is similar to the fourth quarter. So, where are we overall in terms of the macro? Are you starting to see bookings conditions improve generally? And do you see any changes in linearity like things getting better at the end of the quarter? Thanks.

Yes. So, on linearity, that's a great question. So, you've heard me the last couple of quarters talk about seeing bookings being much more back-end loaded, and it was quite exaggerated in the last two quarters and particularly in that final month of the quarter. The way that we've guided for this year is really assuming no change to that linearity, so that's more back-end loading. However, we have seen some stabilization in some of the macro trends that you've heard us call out in the last 12 to 18 months. In particular, we see stabilization in sales cycles, deal size, deployments, and approvals. We've certainly seen that stabilization continue into Q1, where we are as we stand now, and the guidance today just assumes that continued stability.

Yes, and I just want to add to that a little bit. Look, bookings are actually pretty good. Bookings are strong. Given still a bit of instability in the macro environment, upsell for us is a little bit more challenged. So, when we say bookings, I mean new logos and new business in particular. We are seeing strong demand there. Okay? And that really bodes well for the future. The issue is a bit more with upsell and in certain cases down-sell. This is just as businesses are rightsizing. But hopefully, as the economy recovers, this too will turn back into a tailwind. But as you can see from our press release and the releases in some of the prepared remarks, we continue signing up new logos and very important logos. Our enterprise segment is doing very well, but our SMB segment, which is a $1.3 billion business, is also going strong. So, I would say that it's certainly far from being frothy. My general feeling is that things are healthy out there.

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

Hey, thank you for the question. One for Vlad, if I could. So, Vlad, improvement in playbook in a subscription-based model with slowing growth is to roll up smaller competitors and gain scale. Sonalee mentioned inorganic as a potential use of capital during her earlier remarks. So, in your view, what is the argument against rolling up smaller competitors to improve scale at RingCentral and potentially grow margin faster and your dominant market share position?

Yes. Look, so firstly, we are by no means averse to M&A. It has to make sense. We've highlighted our recent acquisition of Hopin and how well it's doing for us. So, I would say that in the Hopin case, it will be more of an adjacency versus a competitor. There are different ways to look at this. But by going after adjacencies, you're acquiring or buying into new total addressable markets and new service addressable markets. Deals like that would provide long-term tailwinds to the business as a whole and would set us up well for long-term growth. As far as buying up competitors, there are various efficiencies that can be garnered. But if we're talking about direct competitors, it's a matter of what they do about the platforms, as they run multiple platforms, do you move from one to the other? I think we have some relatively recent examples in the industry where even amongst our competitors, these types of mergers yielded results that were mixed. So, you just need to be a little bit more careful. But certainly, at the right price, we would never say no. I can tell you that we routinely look at numerous opportunities given our size and the stability of our business. Very importantly, our most recent cash flow expansion in free cash flow and profitability give us reasons to believe that we are a natural acquirer or consolidator. So, we are always on the lookout.

That was very helpful, and certainly look forward to hosting you next week in Boston for the NDR. So, I look forward to seeing you then.

Same here. Thank you.

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

Good evening. Thanks for taking my questions. It's kind of a multiparter as well. So, on the new products, Vlad, big expansion of the portfolio. But they touch up against at least some of what your ISV partners also provide if I think about sales, events. How should we think about where you fit into the ecosystem versus some of the companies that you partner with? And then certainly, just what are you assuming for UCaaS versus CCaaS versus others as we think about 2024 ARR growth just because there have been big differences in the growth rates? Thanks to both of you.

Yes, hi Samad. Yes, look, no, great questions. When you're saying some of the companies we partner with, I assume you're referring to RingCX versus RingCentral Contact Center, which is hosted by NICE inContact. Assuming I have the question right. Look, they are designed to address different segments of the market and different use cases. NICE inContact is a well-established enterprise leader. They have proven success in hosting multi-thousand seat contact centers with very complicated use cases. They sell a very nice niche in the upper end of the market. So, we have this integration with them that's multiyear old, and it has been quite successful for us and for them over the years, and we stay committed to that relationship. Having said this, we clearly see an opportunity at the bottom end of the market as well as maybe even with some of the larger customers but with simpler, more streamlined workflows. We saw an opportunity to come in with a differentiated product that is simpler to use, simple to deploy, and much more cost-effective. We're truly positioning it with disruptive pricing. People are taking notice. We mentioned that we've doubled the number of logos in about three months. We already have some larger customers in the thousands of seats, which was a pleasant surprise for us, but success breeds success. It's very early, but early signs are pretty positive. For now, we believe that the two will coexist.

So, Samad, just to answer your question about UCaaS/CCaaS bookings growth breakdown. Firstly, you know we don't specifically guide on bookings and certainly not bookings or growth by product. But I can give you a bit of color there. We do believe and certainly embedded in the guide and the comments I made earlier about we think we do see upside to where we're guiding. We believe we can grow faster than the market for each of these markets. When I talk about the market, I'm talking about third-party data where UCaaS is mid-single. We think we could grow significantly above that, and then for CCaaS, I think the market is again below 20%, and certainly, RingCX will be well above that. Overall, we believe we will grow faster than the market in both of those segments.

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

Yes. Vlad, you talked a lot about new products, etc. What does the new product direction of RingCentral look like over the next few years? Where do you see untapped opportunities for innovation that can get the company back to reaccelerating growth, as Sonalee pointed out? And it's always good to see founders being involved in the business. At this stage, it's good to have you back. But founders, I'm sure, you will agree more than anybody, Vlad, are not satisfied with the single-digit growth rate. I mean, they're inherently growth people. So, how do we put your new product strategy in the context of your real aspirations for the company and what are the things that you could be doing differently in the next few years? Thank you so much.

Right. Yes. Look, we are, I would say, at the early stages of executing on the strategy that you've outlined. We are actively talking about new product introductions and about becoming a multiproduct company. I can tell you that it sounds simple, but actually, it is a big deal to move from a single product where you have a sales force trained to sell one particular solution, product specialists in one area, and a technology base that only needs to address one use case. Everything now needs to be done several times over, which is a heavy lift. But we think the juice may be worth the squeeze here because it opens up new total addressable markets and expands our cumulative total addressable market. If you look at our recent introductions, we had RingCX reintroduced just last quarter, and it already has over 100 logos. We announced a major win with Harvard, a head-to-head win against a very well-known and funded competitor. We believe these are early signs of coming successes. The goalpost we've set of $100 million in two years from these new products is meaningful. $100 million is a big deal because if we had that today, it would be additional points of growth. It would raise our revenue growth into double-digits. This is early, but we have a strong team, and most importantly, we operate in markets that are still underpenetrated. We're one of the large, profitable companies operating in this space.

The next question is from Ryan Koontz with Needham. Please go ahead.

Thanks for the question. I want to ask about the competitive environment and the shift toward AI features and new products. How is this shift impacting the decision criteria of your customers? Are you seeing a change in the types of competitors you bump into, whether it's a legacy player or companies like Zoom or Dialpad that are more focused on AI? Thanks.

Yes. Well, look, I'll just speak about ourselves. I won't comment on what others are doing. I would question saying that any of them are more concentrated on AI than we are. We see ourselves as an AI-first company. RingCX is leveraging our RingSense technology, and that is having very good traction out there. Our growth is very much tied specifically to being an AI-first product. AI is a great equalizer; with AI technologies, we can go against industry incumbents. We don't need to replicate the entire feature set to be competitive just because the way businesses approach customer service is changing with the availability of large language models and interactive virtual agents. This is a game shift from empowering more agents to handling more transactions at quality while saving companies money by reducing their contact center staff. We believe that RingCX will be a great tailwind. The same applies to Events, which is another product we're highlighting. It is ripe for AI innovation, and we will have much more to share about both products at Enterprise Connect, which is coming up. As far as our core product is concerned, when people buy RingCentral, the reason is relatively straightforward. They buy us for our stability, availability, and compliance, which we have consistently achieved. We offer a robust feature set and integrations that include more than any major competitors. We have a commitment to data privacy that our customers appreciate. So, when we layer AI on top of our industry-leading, stable, global platform, we create a powerful solution. AI is not the sole reason people choose RingCentral, but it enhances the overall value proposition significantly. We are at the start of an enormous opportunity to innovate continuously and differentiate our offerings.

The final question today is from Brian Peterson with Raymond James. Please go ahead.

Thanks, and nice job on the free cash flow ramp this quarter. Sonalee, I appreciate all the color on the demand environment. But let me hear about what's going on at the top of the funnel. How has that trended? Any notable changes in mix there via a partner versus direct or enterprise new products? Would love to get any perspective there. Thanks, guys.

Yes, sure. Thanks for the kind words on free cash flow. In terms of what we're seeing in demand environment, I would say there's not a really big change to call out. One thing that I would just comment on is we did see a stabilization in SMB. We saw strong trends from the enterprise side of the house. We don't really tend to give you much more breakdown in terms of segments. But in terms of how the guidance is reflecting what we're seeing, it's assuming this continued stabilization, so no real improvement. If we were to see an improvement in the upsell environment or if we were to see traction from some of the steps we're taking around churn to improve net retention, that would be an upside to our outlook today. Lastly, I want to emphasize that Vlad and I, along with the senior management team, are extremely focused on stock-based compensation. We guided to significant reductions in 2024. We are looking at 16% coming down from 20%, and we are not going to stop there. Net new grants for 2024 will be down by approximately 50%. We will continue on our drive to bring that down, and you should expect further improvements as we look toward 2025. We care about free cash flow per share, and you should note that the free cash flow per share growth will deliver 25% year-over-year growth in 2024. I look forward to spending more time with all of you in the conferences coming up over the next several weeks. But I wanted to ensure that point was underscored.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.