RingCentral, Inc.

Greetings and welcome to the RingCentral first quarter 2020 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Goodman, Head of Investor Relations for RingCentral. Thank you. You may begin.

Thank you. Good afternoon and welcome to RingCentral's first quarter 2020 earnings conference call. I am Ryan Goodman, RingCentral's head of investor relations. Joining me today are Vlad Shmunis, founder, chairman, and CEO, Anand S.waran, 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 2020 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, 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 gap to non-gap 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 Good afternoon and thank you for joining our first quarter earnings conference call. Before we begin, I'd like to first take a brief moment to address the current macro environment. We're living

In an unprecedented time of global uncertainty and disruption, our priority at Incentral is the health and safety of our workforce, and we acted quickly in transitioning to a work-from-home model. As a leader in unified communications as a service, we believe we have a responsibility to help our communities maintain business continuity. To that end, we began offering Incentral office, for free, K-12 educators, healthcare providers, nonprofits, government entities, and news media organizations. We also announced a free offer for our cloud contact center solution to those affected by COVID-19 related challenges. We're providing our cloud communications and collaboration solutions Two organizations that are working globally and tirelessly to mitigate the impact of this crisis. This offer has been well received, and we now have over 4,000 such organizations now using RingCentral. We wish our customers, partners, employees, and shareholders good health and safety in days ahead. Now on to Q1. We delivered a strong first quarter. with continued strength in mid-market enterprise and channel. We also recently made several key announcements. First, we released RingCentral Video, our own video meeting solution, completing RingCentral's differentiated message video phone, or what we refer to as MVP platform. We announced general availability of Avaya Cloud Office by RingCentral, delivering on the promise made six months prior. Third, yesterday we announced a new unified desktop app, an entirely reimagined user experience for enterprise communication that is available both on Windows PCs and Macs. Key differentiators for our new desktop apps include close integration and real-time switching between message, video, and phone communications, as well as seamless switching of meetings between devices. And today, we're happy to announce that Phil Surgeon has joined us as the Chief Revenue Officer, reporting to our President and COO, Anand Aswaram. Most recently, was the corporate vice president for the U.S. enterprise business at Microsoft. We'll expand on these key announcements later. As to our financial performance, revenue and non-GAAP EPS exceeded our guidance. Key drivers continue to be mid-market, enterprise, and channel. We continue to see strong contributions from our vertical market initiatives focused on education, financial services, and healthcare. These initiatives yielded good results, including an over 15,000-seat win with Cornell University, an over 8,000-seat win with a Fortune 500 insurance provider, and multiple accelerated healthcare wins. Key metrics for Q1 were solid across the board. Total revenue grew to $268 million. This is a 33% increase year-over-year and is above the high end of our guidance range. Total annual recurring revenue, or ARR, surpassed $1 billion for the first time. Mid-market and enterprise continues to be a key driver of our performance. We define mid-market and enterprise as and more. This grew 52% year-over-year to a $524 million business. Enterprise defined as customers with $100,000 or more in ARR grew 59% year-over-year to $318 million. Channel ARR grew 62% year-over-year to Looking forward, in this challenging macro environment, companies are facing the reality that legacy on-premise voice-only systems can no longer meet modern work-from-anywhere requirements. We believe unified communication and collaboration cloud solutions are key for productive customer-partner and internal interactions. We believe RingCentral is uniquely positioned to meet this demand. We have a differentiated, enterprise-proven, global, scalable, and secure unified message video phone or MVP platform. In particular, RingCentral provides cloud-based, enterprise-class global PBS capabilities seamlessly integrated with comprehensive native team messaging and video meeting capabilities. With the recent introduction of native RingCentral video or RCV capability, RingCentral customers can now truly stay fully engaged and productive from anywhere, on any device, and in any mode. Very importantly, we can onboard new customers quickly and efficiently without ever having to go on-site, which is especially critical in the current environment. It has never been more clear that customers use RingCentral for a lot more than just lighting up their legacy desktop phone. As a matter of fact, we saw our app downloads increase over 180% in April versus February, with strong app usage metrics across all modes of communication. To that end, total messages posted in April are up 70% versus February. Total video minutes in April are up over 200% versus February. And total phone calls in-app in April are up over 150% versus February. The triple-digit growth in in-app voice in the last two months makes it abundantly clear that business voice is as important as ever. We've also been very pleased with the update of our new RCEVIDIA or RCEV capabilities. We're seeing rapid adoption of RCEV and now have over a thousand organizations using RCEV as their primary video meeting solution. And this number is growing very rapidly. We are also excited to see our strategic partners embrace RCEV in their UCAS offerings. These include AT&T with Office at Hand and Avaya with Avaya Cloud Office by RingCentral. Speaking of Avaya, as I mentioned, we launched Avaya Cloud Office by RingCentral or ACO on March 31st, delivering on the promise made nearly six months ago. At launch, Avaya had signed a number of leading master agents to sell ACO, including Janin, ScanSource, Avant Communications, Cynics, and Solaris. And today, they have onboarded over 1,700 channel partner agents. With only about one month since the launch, it's still early, but market reception is encouraging. COVID-19 has put an additional spotlight on the limitations of legacy on-premise communication systems. Longer term, we believe that work from anywhere and in particular work from home will continue to be a key requirement for businesses worldwide. Business communication solutions that enable work from anywhere are now more critical than ever. RingCentral has always been at the forefront of enabling people to work from anywhere, use any device and communicate in any mode. With this backdrop and given our recent progress with the differentiated MVP platform that solve a mission-critical need for many businesses, we're confident that in the long term, cloud will continue winning, and RingCentral will continue winning in the cloud. Now, for some additional color on Q1, I will turn the call over to our president and chief operating officer, Anand Aswaram.

Thank you, Vlad. Good afternoon, everyone. I would like to start by extending my wishes for the good health and safety to you, your families, friends, and colleagues. I will begin with an update on how we are managing the business in this COVID-19 environment. Then I'll provide some examples of how we are empowering our customers to succeed in these unprecedented times. But first, I wanted to welcome our new Chief Revenue Officer, Phil Sorjan, who started this week. As Vlad shared, Phil is a 24-year Microsoft veteran and most recently was the Corporate Vice President for the U.S. Enterprise Commercial Business. Prior to that, Phil was the Global Channel Chief, harnessing the power of all partners to drive growth for Microsoft. Phil also led U.S. small and medium businesses and served as the President of Microsoft Canada in earlier roles at Microsoft. We are excited to have Phil join us. Phil brings 30 years of experience Thank you for joining us today. have maintained their high productivity and enabled us to close the quarter on a strong note. Thank you to the RingCentral family for the resilience and commitment you demonstrate every day towards our company, our partners, and our customers in these difficult times. In Q1, we were privileged to have helped many of our existing and new customers transition effectively to work from home while remaining productive in these challenging times. We saw new customers come on board the RingCentral platform in key verticals like education, healthcare, financial services. We saw existing customers accelerate deployment and leverage more elements of our platform and portfolio. And we saw customers take advantage of our differentiated unified application across messaging, video, phone, we refer to it as MVP, and our global capabilities to help keep their employees safe and productive. Let me just share a few examples. In higher education, we continue our progress with Talk to Your Universities. Our most recent win was with Cornell University, where we will provide our MVP communication solutions to their 15,000 plus users. In launching an initiative to modernize its legacy on-premise communication systems, Cornell required a platform that enabled complex call handling services, emergency notifications, and mobility. Leveraging our deep PBS expertise and unified MVP solution, we were able to meet these needs while also delivering meaningful TCO savings. In healthcare, an example is PM Pediatrics, a pediatric urgent care provider. In this time of elevated need, they needed to optimize resources across their 40 plus locations to better serve their patients. PM Pediatrics chose RingCentral Office to seamlessly manage demand across all of their locations. We were able to rule this out in a matter of weeks and deliver full compliance for security and privacy requirements. Another example is an existing customer of our RingCentral office solution we talked about in February, Aviana Healthcare, the nation's largest provider of pediatric home care. This customer wanted to urgently transition its 300 contact center agents to work from home. In less than a week, we were able to deploy our contact center solution to enable these agents to work remotely. An example of a large enterprise win with our unified communications platform is Mutual of Omaha, a Fortune 500 provider of insurance and financial services. Mutual of Omaha selected RingCentral to further enhance its communications platform and support its more than 8,000 associates, sales representatives, and contractors nationwide. We are also excited to have been selected as the new communications platform for the Detroit Lions. The Lions embraced the complete MVP solution as the first virtual NFL draft on April 23rd. This is a great example of a mission critical use case where the customer required a proven, trusted, high reliability solution. Global organizations face even more challenges with disparate legacy on-premise systems, making it difficult for their workforces to communicate effectively. For example, Forcepoint, a cybersecurity provider, recently selected RingCentral's global office solution, which will enable their 2,000 users to be on a global unified solution with MVP capabilities across 13 countries. In closing, it is now more evident than ever that customers need a trusted, reliable, fully featured, unified cloud communications platform that can meet their emerging business needs at a global scale. We are inspired by our customer and partner success stories and are deeply thankful to them for trusting RingCentral with their mission critical communication needs. While these are trying times for everyone, we are extremely optimistic about our future. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

Thanks, Anand, and good afternoon, everyone. I'll begin with a few highlights of Q1 results. I'll then spend some time addressing how COVID-19 is shaping our business and wrap up with how that translates into our 2020 outlook. Q1 was a solid quarter on multiple fronts, and we exceeded guidance and consensus across the board. We surpassed a billion dollar ARR growing at 33% and saw strong momentum in mid-market and enterprise ARR with over 50% growth. And we successfully raised a billion dollar convertible note at 0% coupon, strengthening our balance sheet. We used a portion of the cash raised to repurchase about 38% of our prior notes. Operating in free cash flow includes a non-recurring outflow of approximately $14 million of imputed interest on the repurchase notes. Excluding this, our free cash flow margin would have been approximately 5%. To provide better clarity into cash flow generated by core business activities, we've introduced a non-GAAP free cash flow metric in our press release that excludes its allocations. We exited the quarter with $762 million in cash. Now, I'd like to take a few minutes to address how COVID-19 is shaping our business. We continue to see strong new logo momentum across the board as companies seek to enable employees to communicate effectively in the current work-from-home environment. In our large upmarket customers, COVID-19 has served as a catalyst for some of our existing customers to accelerate adoption of RingCentral across their footprint and use our product across all modes, messaging, video, and phone. Unsurprisingly, small businesses in some verticals like retail, travel, and hospitality are seeing elevated churn. We would expect some variability in this area as long as the economic impact of COVID persists. Small businesses within these verticals account for less than 10% of our overall installed base. We're also seeing some customers extend their payment. However, on a positive note, nearly all of them are actively using our platform. We are closely working with our customers to help them be successful in these difficult times. We hope that these businesses emerge even stronger and with increased loyalty toward RingCentral. Moving to our phone revenue piece, which has historically been about 5% of our total revenue. Due to shelter in place, we are seeing some demand push out for desktop phones. We resell desktop phones as a low-margin add-on to our recurring and accretive subscription business purely for our customers' convenience and is not core to our strategy or long-term recurring revenue growth. For our core platform, as Vlad mentioned, we have seen customers increasingly leverage the RingCentral app, both on laptops as well as mobile devices, with very high adoption and usage, which is an indicator of long-term retention and customer lifetime value. Switching to our 2020 outlook, we've factored in the headwinds and tailwinds mentioned above. We've contemplated and stress tested Various assumptions about what current macro could mean for our business. We believe that in the ensuing outlook, we have conservatively factored in a potential range of outcomes created by COVID-19. With that, let's turn to the outlook for 2020. Subscription revenue. We are raising our subscription revenue forecast to be between 1.024 billion and 1.03 billion for an annual growth rate of 25 to 26%. This reflects Q1 strength, positive new logo trends in early Q2, and a prudent outlook for the remainder of the year given the volatile macro environment. We have also assumed a $5 to $10 million FX headwind from deterioration of international currencies versus the U.S. dollar. Other revenue. We are adjusting our other non-recurring revenue to be between $92 million and $95 million for a growth rate of 8 to 12% versus our previously implied guidance of 25 to 27% growth. This adjustment assumes a further reduction in desktop phone demand. Incorporating our positive outlook for subscription revenue and lower assumptions for other non-recurring revenue, we expect our total revenue to be between 1.116 billion and 1.125 billion for an annual growth of 24 to 25%. We are reiterating our non-GAAP operating margin of 9.6 to 9.7%. We are committed to an annual target of 40 to 50 business points of expansion and redeploying near-term savings from travel and other discretionary items into growth and innovation. We expect non-GAAP EPS to be between $0.91 and $0.94, based on a share count of 93.5 million shares. This includes $0.02 of headwind from what is our previous guidance from lower interest income assumptions given recent yields. We followed a very similar framework for our Q2 outlook, with subscription revenue range of between $244.5 million to $246.5 million, up 26% to 27% growth, and other non-recovering revenue of $15.5 million in growth, and other non-recovering revenue of $15.5 million to $19.5 million growth. Down 14% at the midpoint, witnessing noticeable increase in demand. Ring's central solution solves a mission-critical need for businesses, and that should project well for long-term customer acquisition and retention. The long-term outlook for the cloud communications market is stronger than ever. For a market which was already growing rapidly, new work-from-home requirements should provide an additional incentive. It is now more clear than ever that on-premise systems simply cannot serve the needs of the new work paradigm. We believe that in the post-COVID-19 world, many things will change, and that modernization of business communications through the cloud will be among key priorities. As cloud adoption accelerates, we are focused on making sure that RingCentral continues to win in the cloud. To that end, we are excited about the launch of our new video product to provide further differentiation to our leading UCAS platform. We are also confident that our strategic partnerships, including those with AT&T, Atos, and Avaya, will continue expanding our reach to millions of prospects across the globe, which bodes well for our long-term growth. We pride ourselves in profitable growth. We are committed to our goal of operating at or above the rule of 40 longer term, which we again achieved in Q1. We have a large, loyal customer base, a profitable business model, and a strong balance sheet, which allows us to continue to invest aggressively in product innovation and go-to-market efforts. With that backdrop, we are confident in our ability to lead in this $50 billion-plus UCAS market, Finally, on behalf of RingCentral, I wish you, your teams, and loved ones health and safety. With that, let me turn the call over to the operator for Q&A.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Terry Tillman with SunTrust Robinson Humphrey. Please proceed with your question.

Yes, thank you. Good afternoon. It's good to see the MVP performance. Vlad or Anand, maybe my first question relates to it's one thing to help kind of turn on the MVP capabilities, but what we're looking at here with your business is particularly with the bigger enterprise customers, They've got to rethink the way they're doing business and how their workers work. And so it does seem like a great opportunity for systems integrators and some of these strategic partners. So I'd love an update on Atos and just maybe other conversations or opportunities you could have with other global SIs or just other partners beyond the service providers. And then I had a follow-up.

Absolutely, Terry. That's a good question. So let me just answer that. This is Anand. Firstly, hopefully everybody's family is safe and healthy in these surreal times. And thank you for still making the call and listening to us. So on Atos, we are just early in our work and relationship with Atos. And right now, we are targeting upmarket customers, as you can imagine. And we are experiencing an enormous interest with big brands and large customers. And we feel really good about our joint go-to-market strategy. We are already seeing a lot of traction. As you can imagine, with all of these enterprise customers, since we just got started, the sales cycles are actually much, much longer. We are excited about the progress. You would expect to see some of these come to fruition soon. over the next month.

Got it. Thanks for the answer. And, Mattesh, just as a follow-up, you know, we like to look at that net ad for Office ARR, and it was, I think, 66 million, a strong result. Maybe you could just kind of dive deeper into the drivers of that and how we should think about seasonality of additional ARR as we move through the year.

Thank you. Sure, Kevin. So, yeah. Yeah, I'll double click on Q1 strength, as you mentioned. So a couple of things, Terry, come to mind. There are two or three things that stood out for us this time. The first one is we did see strong new logo momentum across the board. If you take a slice of the large deals over a million dollars, we did have the best Q1 ever. And, you know, it's fascinating to see that we had this drumbeat even during the COVID period. If you look at all the million dollar deals we did, about 60% of those deals actually closed in the second half of March, which would have underpinned the secular shift of this new work paradigm. So that's number one. Number two, deal sizes are getting larger, especially in the upmarket segment. Now again, if you take a slice of this $1 million deals, TCV deals, we saw a 30% year-over-year growth in the TCV itself. So new logo momentum, Deals Trends, and if you now layer on the product dimension, which is Contact Center, we did see year-over-year 2x increase in deals for Contact Center over the million-dollar deal. So I think we were lucky this time to be in this secular shift market, and a lot of shifts fell our way. In terms of seasonality, I wouldn't expect any different seasonality. It will be more back-end noted for us, even Abhaya kicking in towards Q4. We have taken a smidge conservative approach to our guidance, including Essex, but overall sort of more of the same.

Thank you. Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question.

Hey, guys. Thanks for taking my question. Solid job giving the environment. You know, maybe following up on Terry's comment here for Anand, Anand, you know, Terry asked about ATOS, but let's talk about Avaya. Obviously, the Avaya relationship is a huge part of sort of future growth. You talked about sort of traction a little bit. I know Vlad gave some comments, but I'd love to get some more color on sort of the early traction you've seen there and anything you want to highlight given the Avaya deployment. Not so long ago, about a month, but I'd love to understand if there's more color you can provide around what's happening with Avaya and the role out there.

Absolutely. You know, the first thing is, as you said, we launched the joint product on 3.31. Actually, the one thing I'd call out is the entire company globally shifted to work from home just two or three weeks before that. And we delivered on time exactly as we expected. So we're pretty proud of that. Now, roughly a month in, this is what probably I'll share. We've onboarded roughly 1,700 plus channel partners and several master agents. and the early partner engagement and the customer interest and the customer feedback is actually phenomenal. So we're pretty excited about that. April trends, whether it's pipes or ops or leads or the conversion velocity, give us a great reason to feel optimistic about where this is going in the long-term prospects. As you've heard from us, we are confident that you'll start to see ACO contributing towards the end of 2020, but April trends make us pretty comfortable of our earlier commitments.

Got it, got it. And a quick follow-up from Mitesh. Mitesh, you know, if I look at the Q2 guide, it looks like it's up 1% quarter of a quarter, but by my calculations, I think you have a 1% 100-bit FX headwind. So I think it's the same as Q1, like 2% quarter of a quarter sequential guide. I'd like to clarify that, if that's correct. And then two, you know, Anand talked about sort of trends. You've talked about sort of positive early trends in 2Q. How is that reflected in guidance? I'd love to understand sort of how you guys have built that into guidance. Thank you.

Hello?

Did I lose Mitesh? Sorry, sorry, I was in mute. Sorry. Yeah, Bhavan, let me start with your second part of your question first. In terms of trends, which I mentioned, April actually was a very fast start. Our new acquisitions are up 40% in April, year over year. And that's the fastest start to a Q2 I've seen in my eight years at RingCentral. So that's part one. We are seeing acceleration for upsells as well. in certain cases where upmarket customers want to respond quickly in this crisis and want to make their employees more productive. So we are seeing that trend as well. Third trend is in terms of churn. We are lucky to have a diversified base of customers with no major concentration. So we are seeing some pockets of churn, like no surprise in some of the SMB segments in challenge verticals. So that's sort of the puts and takes there. But relatively speaking, it's all, in a way, good news versus the current backdrop. Now, if I project forward what's in the guide, we have assumed that the economy does not materially improve until Q4. And the work-from-home trend continues. So that's one. For subscription revenue, we've also assumed conservatism with this high-risk SMB churn. So that's part two. and then finally to tie it back to your first question, which is your guidance sequential question, yes, that's correct. We do have a point of currency headwind that will persist starting Q2. So if you were to normalize Q2 and if you were to compare it to our Q1 guide, yes, you would see that it's almost very similar, a bit of conservatism given the macro, but no big change given the strength. And look, I'll say this finally, you know the management team here, If the macro improves dramatically, we would expect upside in the second half. That's the way I'd characterize it.

Super helpful. Thank you, guys. Thanks again for taking my questions. Nice job. Thank you.

Thank you. Our next question comes from the line of Mike Turin with Wells Fargo. Please proceed with your question.

Hey there. Thanks. Good afternoon. Good to hear everyone sounds safe and well. Vlad, we saw the launch of the new RingCentral video product early last month. We're impressed you've been able to keep the product roadmap moving forward in this environment. Is there anything else you can share around what you've seen there in terms of adoption or usage so far, understanding it's still early?

Vlad, I don't know if Vlad is muted, but let me just take it as Vlad comes on. So a couple of things. One is, again, goes back to what I said about ACO, which is we launched RingCentral Video right in the middle of the lockdown, on feature, on time, which is something we're really proud of. We are seeing a tremendous amount of increased usage across the board. Our total video minutes in April are up over 200% versus February. broadly, but we are seeing a lot of that translate to the RingCentral Video product as well. We've had, as you know, we've been using RingCentral Video internally for over a year, and with customers for over nine months in beta, and we are seeing that translate in terms of traction with AT&T. Go Set Insurance just announced how they were able to move and transition their entire workforce in a matter of a couple of days over to RingCentral Video and over to actually working from home remotely. And so that was great validation. We talked about worldwide vision, similarly using RingCentral Video to actually continue the work they're doing from a nonprofit standpoint, especially in the middle of the COVID crisis. So early feedback, early usage, early adoption in the last 30 days actually has been really good and something we're very proud of. Vlad, are you on yet? Yeah, my apologies.

No, my apologies. I did the Mitesh thing, you know, which I gave us. Beautiful, extremely well thought out speech on mute.

So, I think you covered the highlights.

Look, I think short version is we're quite pleased. Not only, you know, the timing of being able to get it on time, you know, in these very difficult times, but the product holding up is an enterprise-grade product by, you know, design in every way. So, you know, we built based on our, you know, well-known reliability and our well-known security and, you know, which we've established over the years with, you know, our traditional voice infrastructure. And we're seeing all of this, you know, translating nicely and holding up, you know, knock on wood, I should say, but yeah, but holding up in the video domain as well. Customer feedback is positive. Industry analyst feedback is positive. And I think there is some recent press by third parties, which is rather complimentary of the product.

And look, what can I say?

We have thousands of customers, as in businesses, many more of that in users. We at Ring are 100% on this product. There's many thousand people right there. And look, it's only the beginning for us. This product is pretty good now. It's going to get substantially... You'll see rapid progress here.

We have quite a bit of effort behind it.

And just in summary, I wanted to say, I think we mentioned it in prepared remarks, if I remember, but some NFL teams ran the draft on it You know, talk about security and reliability and, you know, trustworthiness, you know, and they chose us over some of the other, you know, call it better known options for those reasons. So, again, we have our brand values which went into RCV and they will, you know, remain with RCV and it will do well. It will continue doing well.

That's great. Maybe one for Mitesh. It's a lot to go through there in a limited amount of time, so I wanted to ask about one of the additional growth drivers that wasn't in the prepared remarks, the AT&T partnership. Any update you can provide in terms of how that's progressing I think would be helpful as well. Thanks.

Sure, Michael. Yeah, no, good one. Yeah, there's so much to go through, as you said in the transcript. So, yeah, AT&T, I know it saw very good momentum again, actually. So if you double-click on a couple of the drivers We did see increased direct and channel participation, meaning more folks are reselling our AT&T product. That's one. That's resulting into a higher pipe, a meaningfully higher pipe. Churn actually is improving in the base. So if you tie all these three drivers together, we saw a sequential uptick again of over 20% second quarter in a row. after AT&T made RingCentral our lead solution. Look, overall numbers are still smaller in terms of the bigger picture, but I think this may prove out to be a tailwind for future growth.

That's great. Thanks so much. Nice start to the year here. Thank you, Mike. Good job.

Thank you.

Thank you. Our next question comes from the line of Cash Rangan with Bank of America Merrill Lynch. Please proceed with your questions.

Thank you very much. Your CFO does such a good job.

He anticipates all our questions.

It's so hard to ask a good question, but I'm going to try and outfox him. So, Vlad, maybe a question for you, or Mitesh, you can jump in as well, as can Anand. Congratulations. Welcome to the RingCentral family. As you look at the long term, beyond 2020, 2021, Vlad, what are the vectors that drive RingCentral's business?

And among those vectors, what are the things that could end up being stronger than anticipated? or Weaker Than Anticipated.

Thank you so much. Sure.

Maybe I'll take a start and then Vlad can, of course, jump in with the bigger picture. So, Cash, you have outfoxed me here. So, as usual, you're asking big picture questions. So, look, I think, you know, we are thinking that this COVID impact could be a glass half full for us and it's more of a tailwind, we think, than a headwind. because this was the much-needed catalyst for the transition from on-premise to the cloud. And near term, what could go wrong is the risks are churned from the SMB segment in some challenge industries. It's less than 10% of our installed base, but that is a different headwind we need to acknowledge. In terms of tailwinds, The new logos we talked about, right? The new demand we are seeing from these customers, like 40% in April. These are the customers who are quickly adopting, being more agile and weathering the crisis. So long term, we will have a base of energized, loyal customers with even higher lifetime value because they're here to stay. And then now you layer on all the commentary which Anand mentioned about AT&T. I mentioned about AT&T, which is performing really well. We have Avaya. Early signs are very promising. It'll start kicking into high gear in Q4. We have Atos coming on. And Vlad mentioned about RCV, so where we would be able to capture incremental video demand over time. So I think, you know, there are multiple tailwinds going in our favor. Recurring revenue model, it's very predictable. We are seeing sales and marketing efficiencies improve. So I think, you know, we will strive to maintain this rule of 40. That's the way at least I think about the picture financially. and, of course, Vlad can chime in with the bigger picture.

And, you know, if I were to just add a couple of things here, as I look, you asked us for the long term, 2021 and so on. There are, you know, everything Mitesh said is going to help us do what we really think drives future growth for us, which is increased focus on the enterprise. 75% of the time is in the enterprise and that's where we are investing and that's driving a lot of our growth, as Vlad said early on in the prepared remarks. We're going to double down on partnerships Something which our company is known for and we will actually expand, you know, the lens of partnerships. International expansion is a key thing and our focus on key verticals. You know, our traction in healthcare today, education today has been phenomenal. We're going to double down on those six key verticals which further give us a spring in our steps. So that's how I look about the macro strategic elements which drive for the growth.

Yeah, no, it's hard to answer this. Look, obviously there are macro risks, you know, obviously unprecedented times. But, you know, for now we've been holding up, our business has been holding up and, you know, as we already mentioned several times, you know, new logos and acquisitions are accelerating, you know. And, you know, so at this point, you know, I see, you know, way more tailwinds than headwinds. The most obvious tailwind, you know, being that on-prem, you know, traditional infrastructure is not going to hold up in, you know, work from home, work from anywhere. So once you, you know, once people realize that, which I think more and more realize it now, and we're seeing the numbers to prove it, then, you know, we'll go to the cloud and, you know, we look up to be the undisputed UCAS cloud leader at this point. So we will, you know, probably get our fair share and maybe more.

Got it. Thank you very much. Great, great perspectives. Enjoyed it. Congratulations on the quarter.

Thank you.

Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Hi, good evening, and thanks for taking my questions. ...headwinds. But as I think about customer behavior with more people working from home, if more customers are using soft phones, does that actually accelerate the ability to adopt RingCentral? Or how does that change the adoption dynamic for RingCentral software using a soft phone versus a hard phone?

Yeah, 100%, right? Yeah, well, let me try that. I mean, we're already seeing that. So soft phone is always with you. especially if you use the mobile version to remind people one of our key differentiators and for many years has been mobile first we've talked about mobile workforces you know ever since you've known us as a public company and I can tell you for many years before as well so yeah I mean we're just seeing a lot more engagement certainly as we mentioned we're seeing app downloads but also just seeing A lot more engagement. We see a lot more minutes, you know, being used just because this device is always by you. And interestingly enough, once, you know, they are in the app, this is where our MVP, message voice phone capability, which is well differentiated, that's where it comes in, is, you know, we spent, you know, quite a bit of time to make sure that you can As well as between devices. So we just introduced, I think, like yesterday, we introduced our next-gen desktop client, which makes it even easier to do that. So, again, we see increased usage and we project more increased usage and more engagement, you know, from the customer base. And we are also, I would say, you know, cautiously optimistic, but definitely optimistic that with more app usage, there will be, you know, a viral element coming in as well. Again, you know, people find this product useful. We believe it's mission critical, certainly solving the mission critical need for people. And as more and more people get exposed, you know, we think it will be another tailwind for us.

Great. That's helpful. And then maybe just a follow-up. Mitesh, on the outlook for 2020, any color or any kind of double-click you can do on what you're assuming in terms of geographies, North America versus EMEA versus APAC? And thanks again for taking my questions.

Sure, Samad. So APAC is very small for us. So North America is more than 90% for us. International did grow faster this quarter than usual. So we are seeing some tailwinds there. but no material change in the way we are modeling the outlook. Over time, I think with the Athos and Avaya kicking in, there will be some tailwinds internationally, but for now, we have not really modeled in any acceleration.

Thank you. Our next question comes from the line of Sterling Audie with JP Morgan. Please proceed with your question.

Yeah, thanks. Hi, guys. Even though it's early, I wonder if you could give us a sense of the demographics of the types of customers that are in the pipeline through that Avaya partnership. Are they skewing to either a particular industry or a particular size of organization? Thanks.

This is Anand, so I'll take that. The early pipe is essentially, because of the circumstances we are in, is queuing to some of the verticals which we would expect to actually want to accelerate down this path, which is healthcare and education. But outside of that, no, there's no particular patterns I would call out which are different from what we expected, either in terms of segments of customers or any other patterns on any other verticals. These are the only things which I would say is an acceleration based on the times we are in.

Got it. And then one follow-up, Mitesh, you kind of gave us some of the sense of what's happening in SMB, but when you look across the entire business, any sense of the representation from hard-hit industries like travel, you know, hospitality, et cetera?

Yeah, it's similar. It's a little bit over 10% if you then extrapolate across the board. But where we are seeing an impact is on the SMB side of these challenged verticals. Our upmarket segment, even though there may be some exposure, we are seeing some acceleration at the margin because these customers want to make their employees more productive, and so they are pulling in some of the seats they would have normally pulled in later on.

Understood. Thank you.

Thank you, Sterling.

Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Hi, gentlemen. Thanks for taking the question. And as a lifelong Detroit Lions fan, I'm glad to hear you're helping them out. But, Mitesh, maybe start with one for you. I know a lot of people pay attention to the ARR. I wanted to look at kind of the enterprise contribution there. And if we think about some of your larger enterprise customers, the enterprise component of that, how much of that is actually showing up in ARR? And what could that expansion opportunity ultimately look like? Interesting one.

So ARR, the larger the customer, the lower it usually represents in the in-quarter ARR. So if you look at, let's call it the top three deals this time, the top one being Cornell, less than 10% of Cornell's deal value is showing up in our ARR. So more future land and expand. Now if I were to expand that to the top three deals, it's about 30% is deployed in ARR. So I think what's happening, as you actually hit upon a key thing, that as we're signing larger deals, there's this exhaust pipe of land and expand where the commitments go for multiple quarters and multiple years. So not everything shows up in the first quarter. Just to wrap it up, this time 30%-ish in the top three deals showed up in ARR and more to come in the future.

And Mitesh, just maybe in a similar vein, if we had to look at the enterprise base more broadly, did you see a lot of migration on that expand path so far this year? And what would you say is the penetration into the seat opportunity across your enterprise base today?

Yeah, no, good one again, Brian. So I think broad strokes here is that because we are signing up such new logos at a more rapid clip, our Penetration is still about 15-20% in the enterprise base. That business is over a half a billion dollar business now. So even if you don't do anything much, and if you expand this install base, within the install base 5-6x, there is much more room ahead for us just to keep on accelerating just based on that.

Great, Kaur. Thanks, Mitesh.

Thank you, Brian.

Thank you. Our next question comes from the line of George Sutton with Craig Hellam Capital Group. Please proceed with your question.

Thank you. One of the very interesting points I thought you made related to seeing the acceleration of clients who previously only had some of their seats with you beginning to move fully to the cloud. I wondered if you could expand upon that if we think through your top 25 customer's For perspective, what percentage of their seats have actually moved to the cloud already?

I don't have that exact cut, George, for you, the top 25, what has moved to the cloud. Let me try another way. Roughly, I would say in the top deals, call it, There would be about 35% to 40% of the seats would be deployed, just broad strokes, just looking at some past anecdotal data. So you would say at least more than half is left to be deployed.

Okay. One other question on extending payments. You mentioned that's one of the dynamics of the COVID that we're living through. To quote you, if you could double-click on that, and explain the accounting behind it and how that will work for you in the next quarter or two from a revenue impact and a receivables impact.

Yeah, sure. I will double-click, George. And I didn't know you had an accounting minor there. So, yeah. So let's start from – let's address it in two things. Let's start with the working capital and then we'll also start with the REVREC. So in terms of working capital, it's a natural impact, right? We are deferring payments. and we want to help our customers so there will be some working capital impact in Q2 in terms of higher receivables for us. And the good news about that is we do feel very good about these customers even though they're deferring payments because the usage is very high. Like nearly all these customers are using the product, so which is good news. In terms of RevRec, you know, right now deferring payments does not equal no revenue. So as long as they will pay in the future, they will be revered. Having said that, we have taken a bit of a conservative approach and baked in some reserves in the revenue, assuming that some portion of these customers will not come back and will not pay. But that's reflected in our Q1 actuals. So we've sort of de-risked that a little bit.

Perfect. Thank you very much. Sure.

Thank you. Ladies and gentlemen, in the interest of time, we ask that you please keep to one question each. Our next question comes from the line of Medha Marshall with Morgan Stanley. Please proceed with your question.

Yes, hi. This is Karan on for Medha. Congrats on the quarter.

One question we had is just a little bit more color on your customer ads. How many took advantage of free offerings versus paid offerings?

Any color there would be helpful. Thank you.

Yeah, and so our offerings which were free, you know, in light of COVID was basically geared towards the first responders. So the educators, K-12 community colleges, nonprofits, you know, healthcare. So we basically had in the last month about 4,000 plus organizations which took advantage of those free offers to actually get on to our communications platform. We added more than 50,000 users as part of that. and it's rapidly expanding every single day. So that's what we see right now.

Thank you. Our next question comes from the line of Heather Bellini with Goldman Sachs. Please proceed with your question.

Hi, this is Dan Church. I'm for Heather Bellini. Thanks for taking my question. I guess just a quick one for me. You touched on it earlier in terms of the initial feedback on RCV, but Anything you can share with Reliance with respect to what the take rate is from new customers and how you're thinking about converting all of RingCentral's customer base or a portion of RingCentral's customer base over to the proprietary offering and how we should be thinking through any possible margin implications from that. Thank you.

Vlad, do you want to go?

Yeah. No, sure. So the question is... What, conversion to RCD from the base as well as new customers? Yeah, sure. So for new customers, it is a default setting at this point, unless there is a specific functionality gap that's been identified. And so, for example, we have not yet announced GA We have not announced our own webinar product yet. Again, that's underway. So those would be the major exceptions at this point. But everyone else pretty much is getting our CV.

But there is a choice, you know, for people to go, you know, from RCE to Rehunter Meetings, which is Zoom-based, or vice versa.

So we do have that possibility. For existing customers, we are making the switch available at this point, but we are not, you know, actively promoting it. At this point, but you can expect that over time we will see RCV growth within the central family. Vastly, I would say that of RCV. And that RCV is, you know, we are putting our wood behind that arrow of RCV. While, you know, still keeping optionality without a doubt.

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please proceed with your question.

Thank you. First on ACO, just wanted to get a sense of how the level of transition or migration tools that were in the initial version of ACO were meeting kind of the needs of the customers that you were seeing out there and how significant of of an improvement you're expecting in kind of the second version there and how that might change the addressable market of perspective ACO customers. Thank you.

Anand, do you want to go there?

Yeah, so the broad migration tools basically get launched in Q3, so that will be something we expect to see. But at this point in time, we've always worked with Avaya's on-premise base even before the partnership, and we have a very good way to actually help transition the on-premise customers onto ACO. So that's what we are working on right now as the formalized migration tools come out shortly.

Thank you. Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.

Okay, great. Thanks. Yeah, no, again, congratulations on the results. But maybe just kind of two quick follow-ups, both related to enterprise. I wonder, first, you know, there have been, you know, broader market concerns or questions with respect to enterprise sales cycles and whether we see a lengthening of this COVID climate. I wonder if you can comment on what you're seeing. It feels like you may be seeing just the opposite based on what you're seeing in April and the power of the product, but anything broadly within enterprise sales on that front. And then the second piece is, just coming back to AT&T, I wonder if you're seeing more urgency on the part of AT&T to push the RingCentral product into enterprise, given demand. They must be seeing beyond what I think was primarily more of an S&B focus to start.

Absolutely. So I'll take that. So you're right, as you said, as I look across the whole lifecycle of what you would expect from a customer standpoint, Thank you very much. and so that's been good. And the same thing with AT&T. Mitesh talked about some of the data which he shared with AT&T. We're actually seeing a massive increase in the number of sellers who are coming to the table participating in opportunities. We saw almost 30% increase in seller participation in Q1 and we are seeing a fairly significant increase in the enterprise space as we look at April trends with AT&T as well. So you're absolutely right. Slight push, sales cycle slightly becoming smaller, and we're seeing increased traction in the enterprise with AT&T.

Thank you. Our next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Yeah, hi. Thanks for taking my question this afternoon. It's actually a follow-up on an earlier question, just to understand some clarification. In terms of the COVID-19 response, the 4,000 organizations, the 50,000 subscribers that got RingCentral Office for free, I'm just wondering if that offer is in perpetuity or if there's a limited duration in the program and these subscribers can be converted after they fall in love with your product. Thanks.

We basically announced the offer for three months. We wanted to make sure that we do our bit in this time of need for the community. And so that's, you know, so it's a wait and watch for us to see how COVID, you know, hopefully we get to a point as we expect that June will start to seek some recovery and opening up on the ecosystem. Our announced offer was just three months, you know, and we'll see how it goes and make a call on whether we extend it or not in June.

Thank you. Ladies and gentlemen, this concludes our question and answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.