Earnings Call Transcript - RNG Q1 2021

Operator, Operator

Greetings. Welcome to the RingCentral First Quarter 2021 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Ryan Goodman. You may begin.

Ryan Goodman, Head of Investor Relations

Thank you. Good afternoon and welcome to RingCentral’s first quarter 2021 earnings conference call. I am Ryan Goodman, RingCentral’s Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Anand Eswaran, President and Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand and Mitesh followed by Q&A. Some of our discussions and responses to your questions will contain forward-looking statements, including our second quarter and full year 2021 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today’s discussion. In particular, our business is currently being impacted by the COVID-19 pandemic. The extent of its continued impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, the success of vaccination efforts as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings release and in the slide deck. I encourage you to visit our Investor Relations website at ir.ringcentral.com 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, let me turn the call over to Vlad.

Vlad Shmunis, Founder, Chairman and CEO

Good afternoon and thank you for joining our first quarter earnings conference call. We hope all of you are safe and in good health. First quarter was an exceptional start to 2021. RingCentral Office ARR, which includes both UCaaS and CCaaS grew 40% year-over-year to $1.3 billion. We last saw similar growth 5 years ago on a base that was sub-$300 million or less than one-quarter of our current level. And we are seeing the strong performance on all fronts. Avaya and Atos are continuing to gain momentum. RingCentral Office ARR with direct and partners, including all of our key partnerships, grew 33% year-over-year to $817 million. This is an acceleration in growth of 3 points sequentially and 8 points year-over-year. As the work environment turns hybrid for many businesses, RingCentral’s any device, any mode, anywhere, message video phone or MVP platform continues to gain steam. RingCentral was always about work from anywhere. And with our recent performance and accelerating pipeline, we see clear evidence that our solution is right for the emerging post-pandemic world. We saw this manifest in our strong Q1 performance across the board. We saw exceptional strength in our enterprise business, with a record number of Q1, $1 million plus TCV wins and 2 $10 million plus TCV deals. Also, I am pleased to share a new milestone. Our Global 2000 and Fortune 1000 Enterprise business now stands at over $100 million ARR and has grown to triple year-over-year. So, why do we win? RingCentral business successes are underpinned by our industry leading modern, pure-cloud, mobile-first global unified communications as a service platform. It all starts with trust. High reliability, security, data privacy and regulatory compliance are essential to establish a relationship of trust with enterprises worldwide. First, reliability: business communication solutions are the hard bit of any organization. In the hybrid work environment, reliability of business communications platform is more critical than ever before. RingCentral’s consistent delivery of five nines uptime continues to be an important differentiator. This translates to less than 30 seconds per month of downtime. Very few cloud competitors can consistently provide this level of reliability. Another key requirement is security and data privacy. Our security and customer data privacy track record is a meaningful differentiator between us and some of our competitors. And this continues to be a focus area of our investments. For example, in Q1, we acquired Kindite, a developer of leading cryptographic technologies. This provides us with enhanced security capabilities such as end-to-end encryption that we intend to rollout later this year. Additionally, enterprises demand full regulatory compliance and centralized connectivity management across their entire global footprint. RingCentral allows our customers to concentrate on their business with RingCentral taking care of their global connectivity needs in a centralized regulatory compliant manner. This continues to be a strong competitive differentiator for us. Sometimes we get the question who even needs a phone system? Why don’t companies just rely on video and mobile phones for their employees? The answer begins with the fact that there must be clear, well-defined ways for people to reach a business and its employees. While video is clearly very important for meetings, most people use phone and voice to reach companies. This means that on the company side, there is a need for centralized business identity, combined with sophisticated workflows and call flows, auditability, enterprise-wide analytics, and of course, security and regulatory compliance for all of the internal and external communications. And this is where traditional PBXs that are now being replaced by modern cloud-based phone systems like RingCentral come into play. As to mobile phones, they are an important endpoint to RingCentral, similar to softphones and traditional desktop phones. And now with ever more distributed mobile and remote workforces and the new work-from-anywhere paradigm, use of mobile phones and softphones connected via RingCentral is growing at approximately 60% year-over-year. This uptick in use of mobile phones as endpoints on RingCentral proves our original thesis that mobile phones are our friend, not a foe. Doubling down with this trend and further extending our technology leadership, RingCentral has recently collaborated with AT&T to deliver office and hand wireless, a pioneering native integration between the pure cloud PBX and the major mobile carrier's network. This enables fixed mobile convergence whereby users can use their mobile phone number with their desktop phones as well and with full access to cloud PBX capabilities. We believe this new technology will further supercharge AT&T’s momentum in converting their mobile business users to UCaaS. Along with supporting a variety of endpoints, it is more important than ever to provide a seamless user experience across various communications modes of messaging, video and phone, or MVP. With the introduction last year of RingCentral Video, we are incredibly proud of our pace of innovation, with over 100 new features delivered since the launch. And we recently announced new capabilities such as breakout rooms, video virtual backgrounds, presenter overlay and picture-in-picture. At this point, all of our new customers and key partners are delivered only RingCentral Video as part of MVP. We have a rich roadmap ahead and are committed to meeting all of our customers' and partners’ needs through outpaced innovation and product excellence. Further complementing our MVP UCaaS product is the RingCentral contact center portfolio. By adopting an integrated UCaaS and CCaaS solution from a single leading provider, our customers can drive higher employee and agent productivity and improved customer satisfaction. In Q1, we saw exceptional demand for our CCaaS solutions across the entire portfolio. Contact center was included in over 60% of our $1 million plus TCV wins, including our largest contact center win to-date of over $10 million TCV. In closing, we believe work from anywhere is here to stay. The global pandemic has pulled forward years of UCaaS structural awareness and RingCentral is in the pole position with our differentiated trusted platform, accelerating pipeline and the unique partnership network that we believe will be getting even stronger. Stay tuned for upcoming exciting news on that front. With this backdrop, we are confident that we can continue to lead in this $50 billion plus global market. With that, I will now turn the call over to our President and Chief Operating Officer, Anand Eswaran, for additional color on our recent progress. Thank you.

Anand Eswaran, President and Chief Operating Officer

Thank you, Vlad. Good afternoon, everyone. As Vlad said, Q1 was a very strong quarter. ARR growth was strong. New business from every key partner contributed to accelerated growth in our mid-market and enterprise segments. The enterprise segment was exceptionally strong for a Q1 quarter driven by accelerated awareness of the need to modernize their legacy communication systems. Small business was also strong as we are seeing the positive impact of the economic recovery in the segment. Our pipeline exiting the quarter was at a record level across our integrated portfolio of cloud-based unified communications and contact center solutions. I will start with some key highlights. First, RingCentral Office ARR with direct and partners grew 33% year-over-year to $817 million, and more importantly, accelerated 8 points year-over-year. To provide better transparency into the business, we have provided this metric which incorporates contributions from our strategic partners, including Avaya, Atos and Alcatel-Lucent Enterprise, our service provider partners, including AT&T, BT, TELUS, Vodafone Business and other non-channel partners as well as our direct business. Second, our channel community delivered ARR growth of 53% year-over-year, surpassing $500 million with a record level of pipeline generation. Third, we closed significant opportunities and we have built a large pipeline where enterprises want RingCentral Office integrated with Microsoft Teams direct routing. And last but not least, demand for our deeply integrated UCaaS and CCaaS platform was a critical factor in contact center posting a standout quarter with triple-digit year-over-year growth in new logo business. Let me now dive into some detail. I will begin with our strategic partnerships where we saw great momentum. In Q1, we saw solid growth in Avaya Cloud Office seats, new accounts and transaction volume. ACO has proven to win deals in all segments, including up-market. We are seeing strength across multiple verticals, including continued traction in education and healthcare. Atos had a very strong Q1 and exited the quarter with pipeline up roughly 3x sequentially. With new campaigns underway and continued channel enablement, we are excited at the opportunity ahead. We also introduced a new co-branded offering called Unified Video by RingCentral. This innovative and integrated video with team messaging solution equips Atos to expand their addressable market and meet growing need for smart meetings. Alcatel-Lucent Enterprise launched Rainbow Office powered by RingCentral in 8 countries right on schedule. We look forward to ramping the go-to-market motion in additional geographies in coming quarters. While still early, we are encouraged with the initial pipeline generation. Our global service providers delivered a strong quarter and we had some exciting recent announcements. I will start with AT&T. We continue to see positive trends in the new business growth, particularly in up-market. Trends at BT and TELUS were also very strong in terms of both year-over-year growth and pipeline generation. We are particularly pleased to see BT starting to contribute CCaaS wins and elevated up-market traction, since the expanded partnership was announced in Q4. We also continue to expand strategic partnerships with new global service partners, including Vodafone Business, which is on track to launch this year in multiple countries across Europe. As for our channel community, it was another strong quarter. Time and again, our channel partners are proving effective in demonstrating the differentiated value proposition of the RingCentral platform. One channel success story was with Equifax, a leading consumer credit reporting agency. Equifax unified 10,000 users across 24 global locations with RingCentral. Interestingly, channel partners also often drive RingCentral wins even with customers who want tight integration with their other cloud-based solutions. In Q1, we had multiple million dollar plus channel sourced wins, where direct routing with Microsoft Teams to the RingCentral platform was critical. For example, a channel partner provided a great 7,000 user direct routing win with a leading financial services company across over 60 locations. When working with CIOs and IT decision-makers, the conversation begins with reliability, security and platform capabilities. It’s about providing a global platform that can meet very broad and different comprehensive user communications requirements. A great example of this is our win with the American Cancer Society. They had a range of use cases across corporate offices, retail stores and hope lodges for cancer patients. We are incredibly humbled and proud that this inspirational organization selected RingCentral to meet their diverse needs with a single cloud-based platform for nearly 3,000 users across over 100 locations. Our focus on selling a comprehensive communications platform versus point solutions was further demonstrated with a strong demand for our CCaaS solutions in the form of both up-sell to existing customers and new logo business. On that note, we are proud to say we won our largest contact center deal ever: a leading mortgage originator and servicer wanted to replace a mix of older solutions with a single-integrated UCaaS and CCaaS solution for over 6,000 office employees and over 2,000 contact center agents. I am so proud of the many accomplishments of our team in Q1. I would like to extend my thanks to all of our employees and partners for their hard work and dedication and of course, thank you to our customers for trusting us to be a key part of their digital transformation journeys. It is an exciting time in the RingCentral story and I truly believe the best is yet to come. With that, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

Mitesh Dhruv, Chief Financial Officer

Thanks, Anand. Good afternoon, everyone. Q1 was a strong start to the year across the board. All key metrics came in above the high-end of guidance. Subscription revenue grew 34% year-over-year, up from 33% last year and non-GAAP operating margin was above 9%, putting us again well above the rule of 40. We have consistently achieved this metric for the last several years and it is a key metric that we, as a management team, track for profitable growth. Particularly exciting was standout growth in Office ARR of 40%, an acceleration of 4 points versus prior year. This growth was driven by strong momentum with enterprise customers. Enterprise ARR grew 62% year-over-year and surpassed $500 million for the first time. We are also seeing a trend of large enterprises increasingly embracing the entire UCaaS plus CCaaS platform. In PCB deals over $1 million, we saw the number of wins increase more than 50% year-over-year and the average ARR per deal more than doubled. The more new customers are buying from us and these customers are buying more from us. There are several factors that are driving this up-market growth. We believe that the global pandemic is proving to be a catalyst for a meaningful pull forward of awareness and adoption of cloud communication solutions, which is benefiting RingCentral. We are also witnessing higher up-sell. Looking from existing up-market customers, once again surpassed 40% of new business. This is driven by broader implementations of UCaaS as well as the record level of CCaaS up-sell into our integrated solution. And contributions from our diversified go-to-market partner networks are kicking in. As Vlad and Anand noted, we saw an 8 point year-over-year acceleration in direct and partner Office ARR. These partners give us preferential access to roughly half of the 400 million user market. Looking ahead, as more users from partners come online throughout the year, we expect strong incremental contributions. We believe this is just a precursor of sustainable multiyear trends. The market opportunity is massive and under-penetrated. We are excited to see continued traction in this thriving market. Along with the large TAM, the underpinnings of a long-term sustainable SaaS model are always hinged on favorable unit economics to drive healthy long-term margins and I am pleased to highlight several drivers here as well. First, with a larger mix of up-market customers with solid up-sell potential and a sub-5% annual gross churn rate, we are benefiting from a higher lifetime value. Second, as average deal size expands, we are seeing higher sales productivity. Third, RingCentral’s unique strategic partnerships and global service provider partnerships not only expand our global market reach, but also lower customer acquisition costs. We can leverage a highly experienced sales force from partners as well as lower our upfront marketing dollars. This dynamic is even more pronounced in international markets, where we are seeing increasing contribution from partners. And finally, as all new Office sales are with our own RingCentral Video or RCV, we see higher gross margin potential long-term. With that backdrop of structural macro tailwinds, solid UCaaS plus CCaaS performance, momentum from partners and favorable unit economics, we are raising the outlook for 2021. We are increasing subscriptions revenue growth to 28% to 29%, up from 26% to 27%. We are increasing total revenue growth to 27% to 28%, up from 25% to 26%. We expect non-GAAP operating margin of 10% to 10.1%. And we are raising our non-GAAP EPS to $1.24 to $1.27, up from $1.20 to $1.24. We expect to benefit from a slightly lower share count from lower dilution as we redeemed the outstanding 2023 convertible debt. Beyond 2021, we expect to layer on more growth as partners like Alcatel-Lucent Enterprise fully ramped and Vodafone Business starts to contribute. We continue to invest in R&D, growth partnerships and quota-carrying resources. This will enable us to further drive product innovation and build pipeline to capture this large opportunity ahead of us. Multiyear structural tailwinds for UCaaS and CCaaS are still in early days. We believe that we are well-positioned to deliver long-term profitable growth on our path to becoming a multibillion dollar revenue company. Before I turn the call back to the operator, I’d also like to give a big thanks to all the employees at RingCentral. Thank you for your consistent execution. With that, let’s open the call to Q&A.

Operator, Operator

And our first question is from Terry Tillman with Truist. Please proceed with your question.

Terry Tillman, Analyst (Truist)

Yes. Hey, everyone. Congratulations. Can you hear me okay?

Mitesh Dhruv, Chief Financial Officer

Yes, we can.

Terry Tillman, Analyst (Truist)

Okay, great. Thanks and congrats on the Office ARR acceleration. I guess a two-part question. Mitesh, first, if you could just touch on the stock ranking if you will of the Office ARR acceleration and kind of pick that apart in terms of the stock ranking drivers there? And then I’d love to get an update. I don’t usually ask this question, but I’d love to hear about the competitive landscape from Vlad? Thank you.

Mitesh Dhruv, Chief Financial Officer

Sure, Terry. So on the acceleration for Office to 40%, let’s parse out the strength in two elements: the macro and then RingCentral-specific trends. So, on the macro, what we are seeing is a shift in the overall spend environment for cloud communications. If you recall, the biggest issue for the space was lack of awareness and urgency on both. And here we are breaking years of inertia of demand. So, that’s on the macro side. On the RingCentral-specific side, we are seeing a couple of drivers here. The first one is new business trend, where our new logos are up 50% year-over-year on a very tough compare from last year. So that’s one. The combination of UCaaS plus CCaaS is also turning out to be a clear differentiator with a lot of pull-through both ways with multiple on-ramps for us, especially for enterprise customers. Churn has normalized to pre-pandemic levels. And finally, partner contributions from Avaya, Atos and AT&T are kicking in. So overall, I think what we are seeing is the denominator for the 400 million seats coming to cloud PBX is growing at a rapid clip. And we, with our product stack, are able to capture this demand along with our distribution partnership. So, that’s some of the drivers.

Operator, Operator

That was all. Our next question is from Bhavan Suri with William Blair. Please proceed with your question.

Bhavan Suri, Analyst (William Blair)

Thank you and Vlad, Mitesh and whole team, congratulations. What a great result. I want to touch about the partners. And Mitesh, you just touched on this, so maybe you will help us walk through it. But the contribution partners, especially Avaya and maybe Atos, what has that been like in the quarter? And more importantly, what have you assumed in the guide? I’d love to understand some clarity or color around that.

Mitesh Dhruv, Chief Financial Officer

Sure. So we will start with the partners’ contribution from Avaya and Atos. Atos — we will pronounce it Atos — has been off to a good start. It’s clearly a heavy lift to make it a reality. Let’s start with Avaya. Avaya continues to build strength every quarter. This quarter, again, we saw multiple million dollar deals happen. Atos is off to a good start; we are already offering the solution in a dozen countries and we have more countries coming up in 2021. Anand also mentioned Atos pipeline is up roughly 3x sequentially. So, we are off to a really good start. In terms of the contribution, we did try to provide more transparency this time, carving out a metric called RingCentral Office direct and partners, which does capture these key partners and that segment accelerated by 8 points to 33%. Along with our direct contribution, these partnerships are definitely an element there. So, we are starting to see the benefits clearly. One thing to note though is that this benefit is not like a won-and-done from these partnerships; it’s not that you get a benefit in one quarter or one year and then the falloff. We will continue to see the benefits way beyond 2021. That’s sort of the contribution part in terms of what’s in the guide. Look, progress is good to date. And as usual, we have taken a bit of a prudent approach in our guidance. If we assume continued success at this clip, we have left some optionality in the guide, so not baked in everything. And also, one thing to clarify is that we have not baked in much for Alcatel-Lucent and Vodafone, which will be some nice layering for 2022.

Bhavan Suri, Analyst (William Blair)

Got it. Got it. Very, very helpful. Let me turn the conversation a little differently to the competitive environment. We have heard a lot about Zoom and free RingCentral Video impacts on them. Anand, as you look at the sales process and talk to people in the field, how are you feeling about the competitive environment? Has anything changed, especially as you look at the partnerships, some exclusive and some not, and how should we think about that?

Anand Eswaran, President and Chief Operating Officer

Well, it’s a great question. If I look at the macro indicators, our win rates have held steady. In fact, we saw a meaningful acceleration of win rates in the enterprise. The ability to have MVP — message, video, phone — integrated together in a connected way is actually making a meaningful difference. That was one more layer of why you saw that strong Office ARR plus 40% growth. Part of what we saw is that the combination of UCaaS plus CCaaS is turning into a differentiator and driving pull-through. A Metrigy report indicated that increasingly customers are making joint UCaaS and CCaaS decisions and almost 62% of those companies are using the same provider. So this joint UCaaS-CCaaS story, which we have through our partnerships with inContact and our own portfolios, is making a huge difference. Over 60% of our large deals included the contact center. The number of deals with contact center more than doubled year-on-year. So that UC plus CC story is making a huge difference. And then the partners: end of the day, it all comes down to reach into the 400 million plus on-premise seats. With Avaya, Atos, Alcatel-Lucent Enterprise and our service provider partners, we have reach across the 400 million plus on-premise users. These partnerships are starting to execute and create new layers of growth. All that put together — the sales fundamentals are showing progress: accelerating pipeline, deal velocity, close rates — and we feel really good about the competitive environment. We feel really good about win rates and all of that is translating into the numbers.

Bhavan Suri, Analyst (William Blair)

Great. Appreciate the color. Thank you, guys.

Operator, Operator

And our next question is from Sterling Auty with JPMorgan. Please proceed with your question.

Sterling Auty, Analyst (JPMorgan)

That’s great timing. So Bhavan and I are texting back and forth and I am claiming identity theft. I do want to touch upon something that he went into, which is the Microsoft route. You called out the interest in the integration into Teams. We have heard investors concerned about Microsoft competition on top of Zoom competition. Maybe you can walk us through what that pipeline generation and interest from Microsoft customers for that integration and pull-through looks like at this point?

Anand Eswaran, President and Chief Operating Officer

That’s a great question, Sterling. Direct routing was a key part of multiple million dollar plus TCV wins for us in Q1, like the 7,000 user direct routing win I mentioned. What we like about the situation is that when you have a Microsoft installed base using Teams — because it comes as part of E3 and E5 — our direct routing solution gives these customers access to the industry leading UCaaS solution. We see strength in pipeline and win rates. We feel pretty good about that. When we work directly with customers and compete head-to-head, we have seen our win rates sustain and remain steady. So on both instances, whether we compete directly or access the Microsoft installed base, it creates an expansion into a new segment for us via RingCentral direct routing to Teams.

Sterling Auty, Analyst (JPMorgan)

Makes sense. And then maybe one follow-up: I often get confused given you have a number of different ARR metrics as we think about the guidance and the subscription revenue line for the June quarter. What is the starting point? Are we taking total ARR divided by 4 and saying that’s the base and you build on that? Or are we taking the RingCentral Office component divided by 4? Because if I take total ARR divided by 4, it’s greater than your guidance. So clarify that for us?

Mitesh Dhruv, Chief Financial Officer

Sure. Yes, it should be total ARR divided by 4, because that translates into subscription revenue. Now there are two or three elements to consider where revenue lags ARR. One is linearity in the quarter. As we get to larger customers, we bake in a bit of back-end loading in the quarter in our guidance. So we keep it prudent there. The second element is contact center. There is a lag in revenue recognition on contact center because of the implementation cycle. Those are the two reasons why the math may look the way it does. This math is not that divergent compared to previous quarters. So call it our prudence or conservatism in the way we guide to keep the good news ahead of us.

Sterling Auty, Analyst (JPMorgan)

Excellent. That’s very clear. Thank you.

Operator, Operator

And our next question is from Brian Peterson with Raymond James. Please proceed with your question. Brian, is your line on mute?

Brian Peterson, Analyst (Raymond James)

Sorry, mute button, two quarters in a row. Apologies, guys. Well, congrats on the strong quarter. So Mitesh, maybe you could help me a little bit on some of the large deal activity — some impressive 7-figure TCV wins. Any help on some of the financial details there?

Mitesh Dhruv, Chief Financial Officer

Sure. We can unpack the financial details on the $1 million TCV. First, to level set, we did see a record for Q1 in the $1 million TCV deals. The deals were up 50% year-over-year, and again it was a tough compare because last year there was some pull-through from COVID. We did also have two 8-figure deals. One was from contact center. To add color on a few dimensions: first, on the quality of the deals, we are getting larger wins along with an increase in velocity and the ARR per deal actually doubled. That led to the new metric we disclosed of $100 million ARR coming from our Global 2000 customers. We are moving up-market and customers realize the value. Second, where the deals come from: it was broad-based, with 75% of the wins coming from channel partners, and we did see multiple wins from the strategic partners. Third, on the product side, over 60% of the wins included contact center. This is a new driver: we are seeing multi-product journeys, not just more seats. All in all, we are in early days of becoming a multi-dimensional company on both products and distribution, which ultimately leads to accretive growth and margin expansion.

Brian Peterson, Analyst (Raymond James)

Great. Obviously there are a lot of drivers there. Vlad, one for you: you had a lot of good things to share and alluded to potentially some good news on the hardware side. Any more thoughts you can share there? And how should we think about the cadence of new partnerships going forward? Thanks guys.

Vlad Shmunis, Founder, Chairman and CEO

Yes. We are cautiously optimistic that our strategic partnership network will grow in the foreseeable future. It’s too early to call now, but we think we’ve proven RingCentral to be a very good partner to many industry players, starting with the traditional channel, extending into carriers and global service providers, and more recently traditional PBX manufacturers like Avaya, Atos and Alcatel-Lucent Enterprise. Not everyone in the segment is taking a partnership-oriented approach, but we are doubling down on this. We’ve been asked for a long time when are you going to start seeing results from these partnerships, and we are now seeing early signs. As you can see from the numbers, we are maintaining and even slightly accelerating our growth on a meaningfully larger base. We simply haven’t seen this type of acceleration on the ARR side, percentage wise, for several years now. We literally haven't seen this source of growth in many years, and I can tell you we would not be where we are without our partners. It is a strategic initiative for us, and we will be doubling and tripling down on that.

Brian Peterson, Analyst (Raymond James)

Yes. It does. Great to hear. Thanks a lot.

Vlad Shmunis, Founder, Chairman and CEO

Great. Thank you.

Operator, Operator

And our next question is from George Sutton with Craig-Hallum. Please proceed with your question.

George Sutton, Analyst (Craig-Hallum)

Thank you. Vlad, staying on the strategic side, there are a couple of small but what look like strategically important things that you did this quarter that I just want to get a little bit more clarity on: the innovation center in India and the cryptographic acquisition that you made. Can you give us a perspective if we look say 24 months out what these are going to mean for you?

Vlad Shmunis, Founder, Chairman and CEO

Sure. We do feel both are strategic. I’ll take it in reverse order. The security acquisition — Kindite — involves deep security expertise. There is a specific milestone we want to achieve called end-to-end encryption. It’s not the only thing we will do to continue providing world-class security, but end-to-end encryption is something many people can relate to. As the first deliverable, we expect to announce that later this year. We have also recently hired our first Chief Security Officer, who previously held a similar role at IBM and is making a very big difference. As for India, it’s an amazing source of talent. RingCentral is an international company and we have development centers around the world; India was notably absent until now. This will change. We need to continue this type of growth as revenues increase, and our answer is twofold: product and partnerships. Product and partnerships will deliver customers as they have. We see substantial and continued commitment to product innovation. One way to achieve that without breaking the bank is to offshore some R&D to access world-class talent in more affordable locations. India is a fantastic place to do that. We’ve hired a highly regarded leader to run that center and we are very optimistic. In 24 months, you should expect a substantial technical R&D and product presence in India as well as other functions we can leverage such as analytics and some customer service functions, which should be a competitive advantage moving forward.

George Sutton, Analyst (Craig-Hallum)

That’s a great answer. You mentioned being frugal, Mitesh, not apropos. So I think you’re fine. That’s it for me.

Mitesh Dhruv, Chief Financial Officer

Yes. We do balance each other out.

Operator, Operator

Our next question is from Meta Marshall with Morgan Stanley. Please proceed with your question.

Meta Marshall, Analyst (Morgan Stanley)

Great, thanks. Given that you’re seeing such high attach of contact center, how do you see the interplay of your self-developed tools versus your relationship with NICE? Do you see yourself developing more tools that could help you go upmarket into some of the solutions that NICE offers today?

Anand Eswaran, President and Chief Operating Officer

That’s a great question. We have a partnership with NICE inContact for contact center. We use them for Engage Voice and Engage Digital. For digital-first use cases, we often lead with Engage Digital; for other use cases, we lead with NICE inContact. As we look at larger customers, we work with the NICE inContact partnership and product as the primary vehicle for these larger customers. That’s how we approach which customers use which product. Couldn’t be happier with our partnership with NICE inContact at this point in time.

Operator, Operator

Our next question is from Michael Turrin with Wells Fargo Securities. Please proceed with your question.

Michael Turrin, Analyst (Wells Fargo Securities)

Hey there. Good afternoon. Mitesh, you mentioned the feeling you’re now on the path towards becoming a multibillion-dollar software company. Can you walk us through the drivers beyond what you’re seeing today on long-term growth and margin? What you’re focused on and how you’re thinking about the sequencing of those beyond 2021? Thank you.

Mitesh Dhruv, Chief Financial Officer

Yes. The drivers are clear and it’s not just growth but profitable growth. On the growth side, we will layer on incremental drivers to capture the massive TAM. One is product: we have our own video now, which will prove to be a new driver. The combination of UCaaS and CCaaS is another. On the go-to-market side, our partnerships will continue to ramp — Alcatel-Lucent and Vodafone will add in 2022 and beyond. The third part is geography and international expansion, which is performing very well and will increase contribution over time. On the profit side, new customers we onboard with multiple products and larger enterprises are sticky, which leads to high lifetime value. On distribution, we see sales and marketing leverage through partner channels. Combine these growth and profit drivers and you get a profitable growth flywheel for the years to come.

Operator, Operator

Our next question is from Samad Samana with Jefferies. Please proceed with your question.

Samad Samana, Analyst (Jefferies)

Hi, good afternoon. Thanks for taking my questions. Mitesh, this may be for you or Anand: is there a difference in the visibility of the pipeline and deals in any given quarter for direct-led deals versus the pipeline that you have with the 3 As? Do you have just as much visibility or how does that change the guidance framework or impact the guidance framework?

Mitesh Dhruv, Chief Financial Officer

Yes. I’ll let Anand take the first part of the question.

Anand Eswaran, President and Chief Operating Officer

We have pretty good pipeline visibility across the board, Samad. I have good visibility into our direct pipeline, our VARs, and our partners. Our pipeline finished the quarter at historically high levels and April was one of the fastest starts we have seen from a pipeline standpoint. So we feel pretty good about that.

Mitesh Dhruv, Chief Financial Officer

The way we operate is we look at our new bookings forecast and pipeline on a daily and weekly basis. There is a weekly meeting that happens for that and we adjust it when we give guidance. It’s very well fine-tuned and almost scientific in the way we adjust it and then give guidance.

Samad Samana, Analyst (Jefferies)

Great. Maybe just housekeeping: was linearity different in 1Q? Just as a follow-up to Sterling’s question earlier?

Mitesh Dhruv, Chief Financial Officer

Yes, it was different. We did have a back-end loaded quarter, and as you see more enterprise wins, it does tend to be more back-end loaded. So the shape of the curve is a little bit back-end loaded.

Samad Samana, Analyst (Jefferies)

Great, thanks. And congrats on the strong start to the year.

Operator, Operator

And our next question is from Daniel Bartus with Bank of America. Please proceed with your question.

Daniel Bartus, Analyst (Bank of America)

Hey, guys. Thanks for taking my questions and great to see the Office ARR acceleration as well. I wanted to ask about contact center. One, how can your partner network help you more with CCaaS going forward? And two, discuss your aspirations or potential to compete with CCaaS standalone as well? Thanks.

Anand Eswaran, President and Chief Operating Officer

We already leverage partners for CCaaS. The Vodafone Business announcement was UCaaS plus CCaaS coming together. BT’s expanded partnership is contributing to CCaaS wins and is already contributing significantly. You can expect to see more of that going forward. That allows us to bring solutions together because customers are making new UCaaS and CCaaS decisions together. We do have contact center-only opportunities and have successfully competed and won those as well, but our primary focus is the increasing set of customers making UCaaS and CCaaS decisions together.

Daniel Bartus, Analyst (Bank of America)

Very helpful. Thanks.

Operator, Operator

Our next question is from Peter Levine with Evercore ISI. Please proceed with your question.

Peter Levine, Analyst (Evercore ISI)

Congrats on a great quarter. I want to dive deeper into RCV. Can you give an update on how migration to RingCentral Video is trending? When do you think that comes to an end? And as we think about a more permanent remote-work environment, how are companies prioritizing voice versus video? How do video and voice rank in importance?

Vlad Shmunis, Founder, Chairman and CEO

We believe Message Video Phone (MVP) is the right approach. All modes of communications are important and we support any mode on any device anywhere. We see situations where video is more appropriate and situations where voice is more appropriate. Many external customer interactions are voice-driven. Internal meetings during the pandemic have been heavily video-based, which is important. We are not seeing any slowdown in consumption of voice minutes. I mentioned in prepared remarks that we’re seeing a strong growth in mobile endpoints through our platform. Voice is not dead; the majority of mobile calls are voice. There is a right tool for the job and we will continue to provide world-class enterprise voice while rapidly advancing in video. Anand can add on migration progress.

Anand Eswaran, President and Chief Operating Officer

On migration, we have a phased-migration plan that was put in motion before this year. We are making meaningful progress migrating the base. As it relates to new customers, all of them get RCV as they come on board and the feedback has been pretty good so far.

Peter Levine, Analyst (Evercore ISI)

Great. Thank you.

Operator, Operator

Our next question is from Tim Horan with Oppenheimer. Please proceed with your question.

Tim Horan, Analyst (Oppenheimer)

Do you have any sense of the 145 million Teams users out there? What percentage have begun to bundle voice with Teams and where do you expect it to go?

Anand Eswaran, President and Chief Operating Officer

You should ask that of Microsoft, but from our perspective, voice and UCaaS remain important because of reliability, security, data residency and privacy. Our competitors typically provide lower uptime. All of those things matter, so for customers using Teams, our direct routing gives them access to our PBX and UCaaS solution. We are doing well acquiring some of these Teams users via direct routing.

Operator, Operator

And our next question is from Jim Fish with Piper Sandler. Please proceed with your question.

Quinton (for Jim Fish), Analyst (Piper Sandler)

Hey, guys. Thanks for squeezing this in. This is Quinton on for Jim. Just a quick one. We got the change to the top of the funnel with the new free Glip offering. We know it’s still early, but any positive signs from those conversions to paid solutions within your commercial solutions?

Anand Eswaran, President and Chief Operating Officer

Too early to really talk about it. Good progress in the months since we launched Glip in December. It is serving as an incremental lead-generation engine because it gives us freemium optionality. We are also working with partners on it; for example, Atos launched Unified Video, which integrates team messaging and RingCentral Video and is serving as a customer acquisition vehicle. It’s still early to share additional data.

Quinton (for Jim Fish), Analyst (Piper Sandler)

That makes sense. Thanks for the color.

Operator, Operator

Our next question is from Matt Niknam with Deutsche Bank. Please proceed with your question.

Matt Niknam, Analyst (Deutsche Bank)

Hey, guys. Thanks for squeezing me in. We talked a lot about enterprise, but when I think about SMB and mid-market, it seems like year-on-year growth maybe stabilized a little relative to the strong acceleration in enterprise. Can you talk about the competitive backdrop, specifically within SMB and mid-market and how churn is trending in those areas?

Mitesh Dhruv, Chief Financial Officer

On SMB, growth has always been mid-teens historically and we accelerated to the mid-20s over the last year, which is a very good result. It’s an efficient engine driven by a strong e-commerce engine, recent partnerships that help SMB, and the hybrid environment where cloud adoption remains strong. On mid-market, some customers have graduated to enterprise as part of a land-and-expand motion. Overall churn remains sub-5% annually across the business, which is an accretive driver moving forward.

Matt Niknam, Analyst (Deutsche Bank)

Perfect. Thanks for the color.

Operator, Operator

Our next question is from Will Power with Robert W. Baird & Company. Please proceed with your question.

Will Power, Analyst (Robert W. Baird & Company)

Coming back to the enterprise acceleration, Anand, you commented you’re seeing improved win rates in enterprise. What’s driving that? What’s helping set you apart in enterprise specifically to enable that?

Anand Eswaran, President and Chief Operating Officer

Number one, having an integrated solution across message, video and phone makes a difference as companies plan hybrid work; integrated and persistent collaboration via MVP helps. Number two, the integrated motions between UCaaS and CCaaS are important: many companies make joint decisions and tend to buy from a single vendor, and we can offer both. More than 60% of our large deals included contact center and the number of deals with contact center has more than doubled year-over-year. Number three, partners are starting to execute and create layers of growth; we have a full year of Avaya and we’re seeing Atos ramp with pipeline multiplying. The combination of integrated product, CCaaS plus UCaaS, and partner execution is driving improved win rates.

Will Power, Analyst (Robert W. Baird & Company)

Thank you.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.