Earnings Call Transcript - RNG Q2 2025

Operator, Operator

Greetings and welcome to the RingCentral Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devang Shah, SVP of Growth. Thank you. You may begin.

Devang Shah, SVP of Growth

Thank you. Good afternoon, and welcome to RingCentral's Second Quarter 2025 Earnings Call. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Kira Makagon, President and COO; and Vaibhav Agarwal, CFO. Our format today will include prepared remarks by Vlad, Kira and Vaibhav, followed by Q&A. We also have a slide presentation available on our Investor Relations website that will coincide with today's call, which you can find under the Financial Results section at ir.ringcentral.com. Some of our discussions and responses to your questions will contain forward-looking statements regarding company's business operations, financial performance and outlook. These statements are subject to risks, 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 risks and uncertainties related to our business, please refer to 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. With that, I'll turn the call over to Vlad.

Vladimir G. Shmunis, CEO

Good afternoon, and welcome to our second quarter conference call. Before we get into operational details, I have a few important announcements. I want to start by announcing Vaibhav Agarwal as our new Chief Financial Officer. I also want to thank Abhey Lamba for his contributions, and I look forward to working with him in his new role as an executive adviser. Vaibhav has been a key leader at RingCentral for over 9 years and has played an instrumental role in our financial transformation, including prior roles as Chief Accounting Officer, Chief Transformation Officer and Deputy Chief Financial Officer. Vaibhav has played a critical role in helping scale the company from $400 million in revenue to a $2.6 billion run rate business while meaningfully increasing profitability. As CFO, his deep understanding of our business and proven financial leadership sets us up well for our next phase of profitable growth. Now on to additional important news. Today, we announced a multiyear extension of our long-standing partnership with NiCE. Under this extended agreement, we will continue to sell and support RingCentral Contact Center powered by NiCE CXone Mpower. RingCentral Contact Center customers will continue to benefit from the deep integration between two recognized Gartner Magic Quadrant leaders for UCaaS and CCaaS. We look forward to working with the NiCE team offering a best-in-class integrated AI-powered cloud telephony and contact center suite that is the ideal choice for enterprises with complex and advanced use cases. We are also thrilled to have announced yesterday that AT&T is expanding its decade-long relationship with RingCentral. In addition to AT&T Office at hand powered by RingCentral, AT&T will now be adding two of our new AI-first products to their portfolio, RingSense and RingCX. This enables AT&T to start offering RingCentral's cloud contact center and conversational intelligence to their customers, thus elevating customer engagement and experiences through AI-enabled technologies. Moving on to the financial results. Q2 was another solid quarter with all key metrics coming in at or above the high end of our guidance. We are executing on our strategy of accelerating innovation while delivering sustainable profitable growth. Total revenue grew 5% year-over-year to $620 million, which is at the high end of our guidance. Our performance was driven by strong execution in our core business, combined with continued momentum in our new product portfolio, which includes AI Receptionist or AIR, RingCentral Conversational Intelligence and RingCX Cloud Contact Center. Delivering on our commitment to profitable growth, we delivered another quarter of record free cash flow while materially reducing stock-based compensation and debt. Most notably, we achieved both positive GAAP operating income and GAAP net income for the first time in RingCentral's history. Given our financial strength, our Board has approved an increase to our stock repurchase authorization to $500 million. Our success is rooted in our strong leadership in business voice. With the advent of AI, it's been said that voice is a new UI, and we see strong proof points of that in our own business. Voice is the fastest, most expressive and natural way to engage with AI, making those interactions feel seamless and intuitive. It also remains the most preferred channel for customers to connect with businesses. As a global leader in voice, RingCentral is uniquely positioned to benefit. We process tens of billions of minutes per year on our platform, with average voice usage per user remaining stable year-over-year and SMS usage growing. While our traditional UCaaS and CCaaS markets are large and robust, the new outside growth opportunity lies with AI-powered customer experiences. RingCentral services are often the first point of contact between businesses and their customers. As such, we are in a unique position to deploy AI agents from the very onset and throughout the customer journey. With a proven robust global platform to leverage and a significant portion of our R&D now dedicated to our new AI products, we are well positioned to play a leadership role in this rapidly emerging market. We are investing over $0.25 billion annually in innovation with a significant and growing share now dedicated to AI. As a proof point, our new AI-first products, RingCX, RingSense and our newest AI receptionist are already contributing meaningfully to our ARR growth. We are well on our way to meeting the $100 million ARR new products goal for this year, and we expect these new products to comprise a meaningful portion of our overall revenues in a few years. Kira will share additional details on our product portfolio and progress. Now let me share some insights on our key customer cohorts. While we are providing these details again today to highlight progress and performance, please note that we may not be updating them regularly going forward. We continue to see particularly strong momentum with small business customers defined as businesses with under 100 employees as well as with global service providers. Between these two, we now have a $1 billion-plus ARR business growing in double digits with average time to breakeven in under 18 months. Speaking of GSPs, this particular quarter, we are very excited about a couple of marquee customer wins. RingCentral and Vodafone Ireland have secured Ryanair, the largest European airline, planning to deploy across 172 locations in 25 countries. In addition, RingCentral and Vodafone have won a top 10 European bank with seats in excess of 10,000 across their organization. These marquee wins underscore the value of our differentiated service provider partnerships as well as our ability to serve even the largest global enterprises. In general, in larger businesses with more than 100 employees, we continue to hold our own as we add new logos and our retention patterns remain stable. We also see continued demand from larger customers with $1 million-plus TCV deals remaining stable quarter-over-quarter. Of note is our particularly strong traction in our golden verticals that include health care, financial services, retail, travel and hospitality and professional services, where voice is a key mode of communications. Importantly, many of these large customers are adopting multiple products from RingCentral, thus proving the value of our multiproduct platform approach. Kira will share more details and customer examples. Additionally, our Microsoft Teams integration remains a key differentiator for larger businesses. Our RingEX for Teams embedded app seamlessly integrates RingCentral's best-in-class cloud PBX into the Teams environment. RingEX for Teams accounts are growing in strong double digits with monthly active users doubling year-over-year. In conclusion, our core business remains strong and our new AI-first products are gaining momentum with double-digit growth quarter-over-quarter. We are innovating rapidly while driving profitable growth and expanding free cash flow, all while lowering SBC, paying down debt and improving operating margin. Our success is rooted in our robust platform, a talented internal team and unique deep partnerships that are growing and expanding. I am very excited about what lies ahead as we continue to lead in the new era of AI communications and customer experiences. We will share more details on our product and our strategy at our upcoming Innovation Day at the New York Stock Exchange on November 5. A formal invitation will be extended soon, and we look forward to seeing you there. With that, I'll turn this call over to Kira. Thank you.

Kira Makagon, COO

Thank you, Vlad. Let me start by congratulating Vaibhav on his appointment as CFO. Vaibhav is a trusted partner, and I look forward to working with him as we execute on our AI-driven growth strategy. I'm also excited about our extended partnerships with NiCE as well as AT&T broadening their portfolio with additional products from RingCentral. Both of these developments represent new opportunities for RingCentral, and I look forward to working closely with each of these partners. At RingCentral, we're not just adapting to this new era of AI, we are shaping it. Our AI-first platform is redefining customer communications by enabling smarter, faster and more intuitive interactions. Our priorities are to extend our leadership in voice with AI and expand our AI-powered customer experiences. Let's start with AIR. AI receptionist has seen strong momentum now used by over 3,000 customers, tripling the number since our last earnings report. The rapid adoption is driven by its core value proposition. AI leverages powerful AI to ensure no important call is missed, yet it's very easy for everyone to deploy and use regardless of their technical expertise. Today, as part of our Air Everywhere announcement, we launched new capabilities. Air Everywhere brings AI-powered call handling beyond RingEX to third-party telephony systems, both on-premises and cloud. Additionally, RingCentral Air now includes appointment booking with Google Calendar and Microsoft Outlook and supports British and Australian English, Spanish and French to cater to a wider customer base. RingCentral Air will also be available in the U.K. and Australia later this quarter. The top vertical categories where AIR is seeing the most traction include health care, professional services, construction and real estate, financial services and retail. For example, by leveraging AIR, Access Mental Health grew new patient intakes by 60%, resulting in projecting $1.7 million in incremental revenue. And AIR's success is not limited just to our golden verticals. The Detroit Pistons are an early adopter, and they expect to see significant improvements in their customer support response time. I am excited about where we are taking AIR next. It represents a foundational step toward our vision for Agentic AI, enabling businesses to deploy multi-model AI agents that can reason, act autonomously and drive outcomes. Now let's talk about RingSense. RingSense improves business outcomes by using AI to analyze conversations, score calls, identify coaching opportunities and deliver performance insights across both employee and customer experiences. We now have more than 3,600 customers using RingSense, up from 2,800 last quarter, reflecting solid sequential growth and customer demand. As an example, Endeavor Capital, a leading financial services company, saw a 40% increase in sales using RingSense. They saved 50 hours per agent monthly through AI-generated follow-up emails and boosted contact center visibility by 100x. This is a clear example of how RingSense is driving both efficiency and performance. RingSense also transformed operations for books and windows and doors, cutting 600 hours of mail call listening down to minutes and enabling 100% analysis of customer interactions. We are making AI central to how businesses serve their customers, and RingCX is at the heart of that strategy. Our native AI-first contact center, RingCX, helps businesses engage customers across any channel and create immersive agent experiences. Customers are choosing RingCX for its powerful AI features, rich omnichannel capabilities and numerous integrations. One example of a key integration we introduced this past quarter is the newly launched RingCX for Salesforce Service Cloud Voice, which empowers businesses to deliver a unified and streamlined experience for agents by integrating RingCentral's digital channels and voice capabilities into Salesforce. In Q2, we surpassed 1,200 RingCX customers. And once again, half of our $1 million-plus TCV deals included RingCX, underscoring strong demand. One standout customer win this quarter is a leading restaurant chain with 850 locations across the U.S. They selected RingCX with our AI quality management solution and thousands of RingEX seats as part of their digital transformation. With their ambitious growth plans, we are proud to be their customer communication platform of choice. Another great example is a top private university already using RingCX to support 5,500 employees and 35,000 students. They recently added RingCX to modernize their contact center and are already seeing 52% per seat cost savings compared to their previous provider, alongside new operational efficiencies driven by AI. In the second quarter, the rapid innovation of RingCX continued. We launched the control availability of customer journey analytics, providing real-time visibility into full customer journeys across RingEX and RingCX, a key capability in delivering unified experiences. We also made AI agent assist generally available. For example, ClaimSolution Inc. reduced call handling time by 50%, doubled agent productivity and improved first contact resolution by 35%, all driven by surfacing relevant knowledge-based content in real time. And with the data of AI interaction analytics, we are enabling real-time sentiment analysis and predictive CSAT, helping businesses understand customer satisfaction in real time and resolve issues quickly. To sum up, we are rapidly expanding our portfolio with many new AI capabilities. These allow us to deliver tangible outcomes for our customers and contribute to monetization for RingCentral. In closing, we are proud of the rapid AI innovation underway at RingCentral and the real measurable success our customers are already seeing. As the leader in cloud business voice communications, we are in a unique position to apply AI to every customer interaction before, during and after a call. We are supercharging voice with AI and delivering solutions like AIR, which give businesses AI-powered customer experiences at scale. And we're just getting started as we execute on our vision of an Agentic AI future. With that, let me hand it over to Vaibhav.

Vaibhav Agarwal, CFO

Thank you, Kira, and good afternoon, everyone. I'm honored to step into the role of CFO at RingCentral. Over the past 9 years, I've had the privilege of working alongside an exceptional team as we have transformed into an AI-powered multiproduct company. My tenure begins with RingCentral in a strong financial position with approximately $2.6 billion in ARR, expanding margins and record free cash flows. I want to thank Vlad and the Board for the opportunity and Abhey for his contributions. Before turning to the results, let me briefly outline my focus areas to support our priorities. First, drive sustainable, profitable growth through our market-leading UCaaS product and scaling our CCaaS and AI-based offerings through targeted investments in new product innovation. Second, expand margins and free cash flows through cost discipline, particularly in sales and marketing, AI-driven operational transformation, vendor spend consolidation, and prudent stock-based compensation management. Third, execute a balanced capital allocation strategy focused on debt repayment, share buybacks, and reducing share count. These focus areas support continued growth in free cash flow per share while positioning the company for long-term value creation. With that, let me turn to our Q2 highlights. We delivered solid results and executed well across our key metrics. Total revenue was $620 million, up 5% year-over-year and at the high end of our guidance. Subscription revenue grew 6% to approximately $600 million, and ARR increased 7% to approximately $2.6 billion. We have a number of growth drivers that contribute to our top line growth. As Vlad noted, our small business customers and GSPs continue to drive above-market growth and healthy unit economics. Our new products are contributing to overall growth, reflecting strong execution of our AI-led multiproduct strategy. Now moving to profitability. Subscription gross margin remained strong at over 80.5%. Operating margin was 22.6%, above the high end of our guidance, up 160 basis points year-over-year. Second quarter non-GAAP EPS grew 16% to $1.06 per diluted share. We continue to generate year-over-year margin expansion driven by continued spending discipline and focus on operating efficiencies. Sales and marketing expenses as a percent of total revenue declined 170 basis points to 37.8%, reflecting continued improvements in GTM efficiencies. We reduced SBC by 450 basis points year-over-year as a percent of revenue with net new grants down 45% in the first half. As a result, we achieved positive GAAP operating income for the fourth consecutive quarter and also delivered positive GAAP net income. Overall, we view expanding operating margins in conjunction with reducing stock-based compensation as both ultimately driving higher free cash flow per share. In Q2, we generated $144 million of free cash flow, up 33% versus last year. This was driven by continued focus on efficiency and working capital optimization. Free cash flow per share was $1.57 per diluted share, up 37% year-over-year. Moving to our balance sheet and capital allocation. From a capital allocation perspective, we repaid $105 million of our debt, bringing the remaining gross debt down to $1.27 billion and net debt to $1.1 billion. Our net leverage is now at 1.8x. With our strong free cash flow and access to capital, we have sufficient liquidity to meet our near-term and long-term obligations. Both Fitch and Moody's recently upgraded our credit ratings, recognizing our improving leverage and free cash flow profile. We believe that share repurchases continue to provide an attractive relative return. In the first half of 2025, we have repurchased a total of approximately 3 million shares under previously authorized plans. Given our strong financial profile, the Board has now increased our total buyback authorization to $500 million. Improving free cash flow per share is a key priority for us. With our strong performance in the first half of 2025, we are raising our full year free cash flow outlook to $515 million to $520 million or a 20.5% margin, 50 basis points above prior guidance. We are also improving our stock-based compensation outlook to $285 million to $295 million, which is 11.5% of revenue, down 50 basis points from prior guidance. Of note, we remain disciplined in our stock grants. Our annual grants this year are expected to be approximately $150 million or 6% of revenue. We expect for overall SBC to trend lower over time towards these levels as the impact of the prior year grants rolls off. We are reducing our share count projections to 92.5 million to 93 million shares for 2025, down from our previous guidance of 93.5 million to 94.5 million shares. Our free cash flow per share for 2025 is now expected to be approximately $5.54 to $5.62 per diluted share, which is up 31% year-over-year at the midpoint. Now moving to guidance. For the full year 2025, we are reiterating our prior guidance for subscription revenue, total revenue, and operating margins, raising our full year free cash flow outlook to $515 million to $520 million, improving the stock-based compensation range to $285 million to $295 million, raising non-GAAP EPS to $4.20 to $4.32 per diluted share based on 92.5 million to 93 million shares. For the third quarter, we expect subscription revenues of $611 million to $619 million with year-over-year growth of 5% to 6% total revenue of $631 million to $639 million with year-over-year growth of 4% to 5% non-GAAP operating margin of approximately 22.6%, up 160 basis points year-over-year. Share-based compensation range of $72 million to $78 million, non-GAAP EPS of $1.06 to $1.08 based on 93 million fully diluted shares. In summary, let me conclude with key takeaways. We delivered strong Q2 results and are executing well on our key priorities. We continue to lead in business voice with mission-critical products serving over 500,000 customers while gaining strong traction in our AI-led product portfolio, which are contributing to growth, expanding our TAM and increasing wallet share. We believe we have the building blocks in place for sustainable long-term growth. We are making solid progress on expanding margins, generating record free cash flows, and meaningfully reducing SBC. Our strong profile gives us the flexibility to reduce debt, return capital through share repurchases and invest in innovation. This year, we expect to deliver over $5.50 in free cash flow per diluted share, which is a compelling yield for our shareholders. Overall, we have the foundation for long-term sustainable and profitable growth, and I am truly excited about what lies ahead. With that, let's open up the call for questions.

Operator, Operator

Our first question comes from Meta Marshall with Morgan Stanley.

James Eugene Faucette, Analyst

This is Jamie on for Meta. I appreciate you taking the question and congrats on the quarter. I think maybe just to start off, it'd be great to just get any additional color you can provide as to how the renewed agreement with NiCE kind of compares to the legacy arrangement.

Vladimir G. Shmunis, CEO

Yes. Vlad here. Thanks for the question. Look, it's an extension of that original agreement. We've been doing business for a good number of years, I think, what, 6-plus years, something like that. And I know that there was a bit of noise in the community about the partnership coming to an end. That is clearly not the case as we've been flagging all along. To be clear, that original agreement, it never expired. We were still engaged and doing deals and upselling customers, signing up some new deals. But we hope that with this new development, it dispels all kinds of misconceptions and hearsay about where this is going. As I think we said in the prepared remarks, it is an absolutely unique integration, unique in the industry to this day between two clear leaders in our respective segments, RingCentral for UCaaS and NiCE inContact for CCaaS. They are extremely well received throughout, but especially in higher-end enterprises with more complicated needs. And their combination with RingCentral just continues this product, which was really very, very successful since the get-go. I believe our first integration actually even predates NiCE's acquisition of InContact, and it has done even better under NiCE ownership. We're very optimistic. We think that there is a long runway ahead. And like I say, it continues to be well differentiated and a very strong choice for enterprises who are looking to combine their telephony UCaaS and their customer engagement CCaaS needs under one umbrella.

Operator, Operator

The next question comes from Kash Rangan with Goldman Sachs.

Kasthuri Gopalan Rangan, Analyst

Vlad, I'm just wondering if you could talk about what's driving new product traction at RingCentral. And one for you, Vaibhav. Congrats on becoming CFO. Free cash flow generation has been already quite robust. How do you see the sustainability of this going forward?

Vladimir G. Shmunis, CEO

Okay. I guess we'll do in order. What's driving new products is outstanding demand and the fact that we are a very strong leader in business telephony, and we are a very natural choice for people to go to when they are looking to start leveraging AI in their workflows. And if you think about it, RingCentral, we are as upstream as it gets in customers interacting with their business providers. We are the ones shielding that phone call. We are the ones terminating this text message. These are the two primary modes of communications between customers, consumers, and businesses. And we are the ones that are the first line of defense. So it is very natural for us to be adding AI in the form of IVA or AI Receptionist or a little bit down the line from that, conversational analytics. We are in a unique position to be able to infuse AI into the entire workflow before, during and after the call. And given our position in the industry, given our brand, the fact that now we have a pretty complete AI portfolio to ride on top of our well-known platform, that is what's allowing us to grow these products double, if not triple digits quarter-over-quarter. And this is very early. I mean, it's just the beginning. There will be a lot more of that.

Vaibhav Agarwal, CFO

Thank you, Kash. This is Vaibhav. I appreciate the congratulations and the initial question. We are very proud of our free cash flow achievements over the past three years, having increased it fivefold from $100 million to $500 million. This growth is durable and sustainable for a number of reasons. First, we have established a consistent track record of year-over-year improvements. I have projected free cash flows to exceed $500 million this year, representing a 30% increase compared to last year. The improvement stems from our business's operating leverage, strong gross margins, and continued cost discipline. Additionally, the quality of our free cash flows is enhancing as operating margins and free cash flows are aligning due to working capital efficiencies. Lastly, when assessing free cash flows, we also consider stock-based compensation. We have implemented significant measures regarding stock-based compensation, as mentioned in my prepared remarks, which together with buybacks will help reduce our share count. Overall, considering all these factors, our free cash flow guidance for the year is now above $5.50, a 30% increase year-over-year, representing a compelling return for shareholders. I believe we have a solid foundation to sustain and enhance our free cash flows moving forward.

Operator, Operator

The next question comes from Samad Samana with Jefferies.

William Fitzsimmons, Analyst

This is Billy Fitzsimmons speaking on behalf of Samad. I'd like to delve deeper into the free cash flow question. Looking at the guidance, what stands out to me is the decrease in SBC expenses that you just mentioned. Over the last few years, SBC as a percentage of revenue has decreased and is expected to continue declining. Could you explain some of the internal changes you've implemented to achieve this reduction? Additionally, what has specifically changed regarding this line since you provided SBC guidance at the beginning of the year?

Vaibhav Agarwal, CFO

Yes. Thank you, Billy. This is Vaibhav. So I'll address that. Look, reducing SBC is a key priority for us. And I think we outlined that on the prior earnings call. And we've made a lot of progress on this over the years. SBC as a percent of revenue has come down by almost half. It used to be around 20% of revenue. We are now tracking to about, call it, 11% based on the guidance we provided. Look, stock grants continue to be a key tool for us to incentivize employees. So we'll continue to use it. And we want to make sure that the employees' interests are aligned with shareholders. So it will be a key tool for us to incentivize people. However, having said that, we remain disciplined in terms of our net new grant, which in our prepared remarks, I mentioned, will be around $150 million or about 6% of revenue. So as you know, SBC has two components. It has the tail from the prior grants, which were higher and granted at higher prices, and it has the impact of the in-year grants. So over time, as the older grants roll off, our SBC run rate will increasingly reflect just the new grant activity just significantly.

William Fitzsimmons, Analyst

There was an increase in second quarter revenue, but the full year revenue guidance remained unchanged. This suggests similar expectations for subscription revenue growth in both the third and fourth quarters. Can you clarify what assumptions were made for the second half guidance? Additionally, what are your thoughts on macro deal activity and renewals for the latter half of the year?

Vaibhav Agarwal, CFO

Yes. Look, in terms of the guide, there is no fundamental change in the overall philosophy or the approach, if you will. It's consistent with how we've guided in the past, which is we provide prudent guidance around the visibility that we have and based on what we know. But there are always puts and takes in a business of this size. So overall, look, from a Q2 standpoint, we had a good strong quarter. The business is fundamentally strong. We have a number of growth drivers. Vlad in his prepared remarks had talked about small business and GSP growing in the double digits. So they are showing good demand trends. In terms of our enterprise business, we continue to sign $1 million-plus TCV wins. So when you take all of those things together and overlay some prudence on top of it, that's how we ended up on the guide. Overall, we reiterated the guidance on the top line while raising free cash flow and operating margins and reducing SBC in a material way. So overall, net-net, feel good about the guidance range that we provided.

Operator, Operator

The next question comes from Peter Levine with Evercore.

Peter Marc Levine, Analyst

Could you share your thoughts on the RingCX strategy? You've mentioned there's significant market potential for it, which isn't going to change. How do you plan to market RingCX? How will your sales representatives differentiate between RingCX and NiCE? Please explain some of those dynamics.

Vladimir G. Shmunis, CEO

Yes, that's a fair question. It's not that complicated, and we've been clear about this. There are different products designed for different audiences. RCCC, based on NiCE inContact, is a high-end enterprise product. It has no limit on the number of seats and boasts best-in-class capabilities to handle any complex use case. It’s the top-tier product in our lineup for cloud PBXs. We recently announced Ryanair as a client, and they're quite significant in Europe. Along with this, we've also partnered with a major bank that requires more than 10,000 seats. This demonstrates our ability to scale. We've seen that many customers prefer to buy from a single vendor, but currently, no vendor can provide both high-end UCaaS and CCaaS solutions natively. This is as close as it gets, and there is nothing on the market with such a high level of integration across the customer journey, from sign-up to support. CC is well-suited for more complex needs, while CX is an excellent product too, primarily aimed at smaller and simpler use cases. CX may have more clients but generally has a lower average agent count compared to CC. We recognize that some larger companies fit well with CX, but those instances are specific and not common. In contrast, CC covers a broader spectrum and includes features that scale down more effectively, like self-service and AI capabilities. We believe both products can coexist successfully. We've been able to grow both until doubts about the partnership arose, but we’re optimistic that those issues are being resolved and that the channel will be revitalized.

Peter Marc Levine, Analyst

Could you share your thoughts on the long-term sustainability of growth? Specifically, how do you view the potential for mid-single-digit growth alongside increasing profitability? Could you elaborate on your approach to balancing growth and profitability? Are you prioritizing maintaining low to mid-single-digit growth while enhancing profitability? It would be helpful if you could provide a framework for understanding your long-term model.

Vaibhav Agarwal, CFO

Yes. I think in terms of the framework, we are a growth company. So we'll continue to grow. And there are multiple growth drivers that are durable. So in the UCaaS space, look, we continue to be the market leaders with steady market share. There are pockets of the business like SMB and GSPs that are growing in the double digits. And in terms of our enterprise space, we are continuing to add $1 million TCV wins. We are adding logos at a decent clip as customers move from on-prem to the cloud. In addition to that, our new AI products are now gaining traction. So Vlad and Kira in their prepared remarks talked about the multiproduct portfolio and the strong traction that we are seeing there. Our new products combined are growing in the double digits, and we are well on track to hit the $100 million target by the end of the year that we had laid out. So in my mind, these will all be drivers for sustainable long-term growth. In terms of profitability, the framework that I called out in my prepared remarks was to continue to expand both free cash flow as well as operating margin. And that will come from two places. There will continue to be operating leverage in the business, plus we'll be disciplined in terms of our cost management. So together, we will continue to be on that path of margin and free cash flow expansion. And then when you take that together with SBC reduction and share count dilution, our goal is to maximize free cash flow per share, which we think is a key metric to track for shareholders on a go-forward basis.

Operator, Operator

The next question comes from Catharine Trebnick with Rosenblatt.

Catharine Anne Trebnick, Analyst

Two quick ones. One, last quarter, you noted that Microsoft grew 30% year-over-year. You talked today about RingCX now a piece of it. Can you talk about the size of the deals that you're seeing through the Microsoft partnership?

Vladimir G. Shmunis, CEO

I’m not sure how you included RingCX in that discussion. We have an integration with Microsoft Teams and utilize several APIs they offer. Our integration is quite effective, making it easy for Teams users to access RingCentral’s features, which significantly surpass what Microsoft offers. We are experiencing strong double-digit growth, particularly aimed at larger enterprises. It's important to note that most Teams users are indeed part of larger organizations, and small to medium-sized business customers use Teams much less frequently. Despite that, we found that half of our enterprise deals involve this integration, which serves as a major differentiator for us and is a valuable asset that we plan to continue leveraging.

Catharine Anne Trebnick, Analyst

The follow-on quick question is, with this reduction in debt, what is your capital allocation strategy going forward? Are you planning to pursue more acquisitions? How do you plan to use the cash you have?

Vaibhav Agarwal, CFO

Thank you, Catherine, for your question. In terms of capital allocation, generating over $500 million in free cash flow gives us significant flexibility and allows us to be opportunistic. As I mentioned in my prepared remarks, we will continue to focus on reducing our debt and strengthening our financial position. For example, in the second quarter, we paid down about $100 million of debt, bringing our net debt down to $1.1 billion. We aim to reduce it further to under $1 billion. Our net leverage has improved and is now below 2x. This past quarter, our strong EBITDA margins, which are growing faster than revenues, have led to upgrades in our ratings from both Fitch and Moody's. We are now one notch below investment grade, which is a strong outcome for us. I believe that at the current stock prices, stock buybacks present an attractive opportunity. Therefore, we will continue our stock buybacks as authorized. Additionally, our Board has increased our stock buyback authorization to $500 million due to the strength of our financial profile. We will also continue investing in innovation; as Vlad mentioned, we are allocating $250 million towards R&D, focusing on new products that are gaining traction and will drive growth. From an M&A perspective, we will allocate capital as suitable opportunities arise. Overall, our approach will remain flexible and opportunistic, based on the return on investment.

Operator, Operator

Our next question comes from Michael Funk with Bank of America.

Michael J. Funk, Analyst

I wanted to revisit the NiCE and the AT&T extensions and whether they indicate a strategic shift in your go-to-market approach. I'm receiving some feedback, and I apologize.

Vladimir G. Shmunis, CEO

Both initiatives are extensions that indicate a strategic shift, so let's discuss them individually. Regarding NiCE inContact, we have reclaimed a powerful tool that we've had for years, which is this advanced combined UC/CC offering. It's important to note that we were always under contract and entitled to continue selling this product. However, given the market's noise and confusion, it was challenging to persuade people that this product had fallen behind. Now, with a multiyear extension in place, I can assure you that we view this as a strategic relationship and are pleased to see it continue. We believe there is still significant potential in this area, and I hope you will hear similar sentiments from Scott and their management team. As for AT&T, this is a significant development. They've been a strong partner of ours for over a decade, which is noteworthy for us and perhaps even for AT&T. Without speaking for them, it's important to highlight that their decision to extend their relationship with us and incorporate our newer products into their portfolio is incredibly meaningful. AT&T is a leading global brand and a major player in U.S. telecommunications, not just domestically, but internationally as well. Their choice to adopt our technology to introduce their customer base to this new AI era is significant. While this doesn't represent a change in our go-to-market strategy, we believe it will create major opportunities for our new products, including RingCX, RingSense, and potentially others as they develop.

Michael J. Funk, Analyst

Just more specifically when I met with John Stankey recently, you highlighted they want to actually lean in a little bit harder to SMB. They felt they've given up market there too much in the last few years. So as part of the agreement, will this be more of a product by AT&T in their Salesforce incorporating your functionality? Or will it be an add-on where a customer can elect it, but won't necessarily be part of the core offering? And then final question, if I could, please. Can you call out any FX benefit or maybe just isolate the constant currency growth during the quarter? And then what you have in your expectations for the remainder of the year for FX just given the movements in the rates recently?

Vladimir G. Shmunis, CEO

I'll take the first part of the question. Look, as far as AT&T's go-to-market philosophy or tactics, you have to ask them. I can tell you that it's a deal that we believe is a fair deal. Everyone wins. It's good for us. It's good for AT&T financially. And of course, it's very good for the customer because remember, these products are about saving people time and money and saving leads and letting calls not drop on the floor, but instead result in positive business outcomes. How exactly they're going to do and package it, you would need to talk to them directly. But what John said about them wanting to regain a bit of share in SMB certainly, we could not be happier to hear that because it is definitely a strength of us and our offering, okay? And Vibhav will take the rest of the question.

Vaibhav Agarwal, CFO

Yes. In terms of FX, look, there was some benefit in the quarter, nothing meaningful. So nothing specifically to call out there. Overall, look, we had a good strong quarter. We had sales bookings coming in at a healthy clip. And overall, we called out the strength of the business in terms of small business and GSPs growing in the double digits. So overall, we ended strong and reiterated our guide for the year.

Operator, Operator

At this time, we have time for one more question. The next question comes from Brian Peterson with Raymond James.

Unidentified Analyst, Analyst

This is John on for Brian. On the AIR receptivity there, it's great to hear about the early success with AIR, and I know it's still really early. And you got into some of the prepared remarks, but just curious where you're seeing the most success so far. It sounds like larger customers are really the early adopters there, but are you also seeing positive adoption across mid-market and SMB? Sort of said another way, is AIR adoption running? How is it running versus expectations across customers of various sizes?

Kira Makagon, COO

This is Kira. I believe the rate of adoption is very encouraging, with the number of customers increasing from 1,000 to 3,000 in a short time, indicating strong demand. Regarding customer demographics, many small customers are purchasing, along with some larger ones. The use cases are similar in that they primarily involve routing calls. Essentially, it provides a digital employee that never misses a call, which is especially beneficial for small businesses that need a receptionist but cannot afford one or those that receive after-hours calls with no one to answer them. For larger businesses, the use cases focus more on efficiently routing calls across the organization without needing complex IVR systems. The value remains consistent, as it reduces costs, enhances opportunities for monetizing incoming calls, and manages expenses. This results in a better overall customer experience. Customers are adopting this solution easily because it is specifically designed for their needs. There’s no need for a complex implementation or technical expertise; it works for any size business and requires no IT support. You can get started simply by configuring it for a particular use case.

Operator, Operator

Thank you. At this time, I would like to thank everyone for joining the teleconference. You may now disconnect your lines, and have a great day.