RingCentral, Inc.

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

Thank you. Good afternoon and welcome to RingCentral's second 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. Warne, 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 third 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. The discussion of the risks and uncertainties related to our business is contained in our fire lines 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. 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 of the non-gap financial guidance to the corresponding gap measure is not available as discussed in detail in the slide deck posted on our investor relations website. With that, let me turn the call over to Vlad.

Good afternoon, and thank you for joining our second quarter earnings conference call. We hope all of you are safe and in good health. The pandemic has created unprecedented global challenges. and is heading a transformative impact on how businesses operate now and in the future. Crowd transformation of business communications platforms has become a priority as companies adapt to a work-from-anywhere environment. Businesses of all sizes now require communication solutions where employees can work productively with customers, partners and peers from anywhere, on any device, and in any mode. We embarked on this journey of enabling cloud migration of business communications over a decade ago. RingCentral is now uniquely positioned to meet these demands with our enterprise proven, global, and trusted unified message, video, phone, or MVE platform. The results We delivered a strong second quarter as we continue to benefit from strong contributions from mid-market, enterprise, and our channel partners. Let me highlight some recent key events. First, we announced an expansion of our strategic partnership with Ados. Second, together with Avaya, we announced a further global rollout of Avaya Cloud Office by RingCentral. Third, we saw good uptake on our new RCT offering, which we launched in early April. We'll talk more about this later. And lastly, we were humbled to learn last quarter that RingCentral has been named to the Forbes Global 2000 list, putting us alongside the biggest and most valuable companies in the world. As to our financial performance, revenue and non-GAAP EPS exceeded our guidance. Key drivers continue to be mid-market, enterprise, and junk. We delivered a record number of 7-figure TQV wins this quarter. Several of these large wins were in our targeted verticals of health care, financial services, and education, and also included multiple international wins. Key metrics for Q2 were solid across the board. Total revenue grew to $278 million. This is a 29% increase year-over-year and is above the high end of our guidance range. Importantly, total annual recurrence revenue, or ARR, grew 36% year-over-year to $1.1 billion. The difference between overall revenue growth and higher ARR growth is driven by higher adoption of RingCentral apps relative to sale of new desktop devices. We believe the strong P2 results serve to validate RingCentral as the Inc. leading platform in the global UCAP market. We look forward to building on this momentum and expanding our market reach

to maximize the opportunity ahead.

On that note, we recently announced that RingCentral will be the exclusive UTS provider to Atos Unified. Unified, formerly Siemens Enterprise Communications, was acquired by Atos in 2016. Approximately 60% of their on-premise install base of 40 million users is in Europe. with a strong presence in Germany. This opportunity is in addition to our system integrator relationship announced earlier as part of the Atos digital workplace portfolio. Importantly, during the last few months, Atos and RingCentral saw a pent-up demand to address unified install base together. Atos has accelerated its reseller outreach efforts and now has more than 90 channel partners trained to sell the new Unified Office Barrier Central or UO. We expect to be live with UO in 11 countries by the end of the year. This includes Germany, France, Spain, Italy, Netherlands, Austria, Belgium, Ireland, US, UK and Australia.

We're also excited to welcome Atos as a direct customer to the Unified Office solution.

Atos will start with deploying UO to the 5,000 strong employee base of its Atos UCP division, formerly Unified. Atos will later expand UO to their entire base of over 100,000 employees. After a while, Based on joint channel enablement efforts and first joint customer win with Avaya Cloud Office or ATO, we are quite pleased with the early progress of this partnership. There are now over 2,000 channel partners on board. There is a robust pipeline building and several important large deals already on the books. An example of a large joint win was a selection of our platform by a large BPO that supports the UK government's COVID-19 tracing program to control the spread of the virus. In this highly urgent and critical use case, the solution leveraged RingCentral's open API platform and was rolled out to multiple thousands of users in approximately six weeks. In June, ATO was launched in Australia, Canada, and the UK. Several new features and additional migration tools were also released in June, which will make cloud migration even more seamless moving forward for large companies. Of course, our success with these great partnerships is rooted in our leading comprehensive message video phone or MVP platform. It is only by enabling their employees to communicate via any mode from any device and from anywhere that businesses can stay productive during this trying time. To that end, we saw double-digit growth in messaging and triple-digit growth in video and mobile voice minutes on our MVP platform quarter over quarter. Speaking of video, our new open campus-based RingCentral video or RCD platform has been quickly evolving since its launch in the beginning of April. Feedback and customer reception has been very positive, and we already have over 10,000 paid RingCentral Office accounts enabled with RingCentral Video. Building on the successful launch of RingCentral Video in June, we announced the initial release of RingCentral Rooms. This extends the power of RingCentral Video to conference rooms and meeting spaces, which remain important even in these trying times. Overall, we are proud to be able to assist in the fight against a global pandemic. Our mobile-first enterprise communications platform, combined with our open integration API, has enabled major institutions like State of West Virginia to rapidly deploy our solution with embedded communications capabilities for thousands of contact tracers to reduce the impact of the pandemic. In summary, RingCentral has always been committed to enabling workforces to productively communicate and collaborate via any mode, on any device, from anywhere. And with the new world order, working from anywhere is no longer a knife to cut. It is now a carbon integrity. RingCentral is now becoming a platform for business ingenuity. With our well-proven MVP global solution, and our rapidly evolving strategic partners and reseller ecosystem, we are confident that the cloud will continue to win and RealCentral will continue to win in the cloud. Now, I will turn the call over to our President and Chief Operating Officer, Anand Aswaran.

Thank you, Vlad. Good afternoon, everyone. Operationally, Q2 was a very strong quarter. We are laying the foundation for the next phase of sustainable multi-year growth. The business is thriving, and the demand for our cloud-based business communication solutions is higher than ever. Our open, integrated MVP platform enabled us to add more new customers in Q2 than any other quarter industry. Interestingly, This was accomplished without requiring much physical travel for our sales and professional services organizations. There was broad strength across a number of important segments and initiatives. In the enterprise segment, we saw a record number of seven-figure TCEs. We also had a very strong quarter for our contact center portfolio, which was included in approximately half Our channel plays a strong role in our success. Channel ARR increased 60% year-over-year to $375 million. As we continue to grow to become a multi-billion dollar revenue company, we are expanding our strong foundational focus on the four P's. Products People Processes and Partners. These efforts will enable us to serve our customers' needs even better, especially in targeted vertical markets. Let me share some more details. First, in the product area, innovation was and remains our first principle. We launched RingCentral Video, RingCentral Rooms, and together with Avaya, We launched Avaya Cloud Office by RingCentral with subsequent international expansion. I would also like to highlight that this velocity of innovation happened with most of our development teams working remotely. Second, on the people front, we have continued to expand our management team, attracting top talent, including incredible industry leaders like Chief Revenue Officer Phil Sorgen and our Chief People Officer Gunjan Agarwal who we announced recently. Attracting and retaining a strong and diverse pool of talent is so vital to our long-term success and it is a priority for our management team. On that note, hearty congratulations to Vlad for recently being named amongst the top two CEOs for diversity and amongst the best CEOs for women in the annual competitively survey covering 60,000 organizations. Regarding business processes, we are making great progress to automate and digitize our end-to-end process and operations as a foundation for scale. This will enable us to apply AI and machine learning to better predict customer needs and deliver enhanced and proactive value to our customers. Now let's talk partners. First, Vlad shared the details on the strategic partner front with Avaya and Arcos, which helps us to further scale our global reach and capture the massive opportunity of it. Second, we continue to see strong performance from our service provider partnerships led by our renewed momentum with AT&T. And finally, we also continue to invest in our channel partner ecosystem. During the quarter, we launched Ignite, a new partner program. This program enables partners to own the entire sales cycle with their customers. Overall, our partners contributed to over 70% of our seven-figure wins in the quarter. Let me bring them to life with a few great customer examples. One example of a marquee channel win in Q2 is Marvel Technologies, a leading global semiconductor company. Marvel needed a highly reliable, scalable, and a global communications platform to replace their legacy on-premise systems. Our mobile-first platform, our global coverage, and integrations with other enterprise solutions were important differentiators in securing the 6,500 plus user win spread across 20 plus countries, including India and China. Another notable channel win was with one of the largest custom print apparel companies. They needed a tightly integrated cloud-based Communications and Contact Center Solutions. This is an 800-plus user UCAS win combined with over 250 RingCentral Contact Center seats. As we expand our go-to-market motions, we are finding compelling new opportunities across several important verticals. In healthcare, we had a seven-figure upsell win and a leading U.S. provider of behavioral health care services. This important customer is using our unified communications platform to better operationalize their business across the country. In Q2, they expanded by 50% to over 7,500 users as they continue to roll out RingCentral across their increasingly distributed workforce. In education, a large, globally renowned U.S. university expanded their use of RingCentral often, with an additional 1,500 users added during Q2. This is a great example of the opportunities emerging due to COVID, where we saw an accelerated deployment cycle at this university, with tens of thousands of potential users still ahead of us. There is higher usage of our RingCentral apps versus desktop phones, which is a positive indicator of better user engagement. In addition, the implementation has been accelerated to ensure seamless continuity for the upcoming school year. In financial services, we secured a 2,500 user win across 15 countries with a large private equity fund. For this customer, our rich platform capabilities, service quality, security, and global reach were key competitive differentiators. Finally, last year, we highlighted an English digital win with a large air transportation company. Over the past year, we have demonstrated the value of our great central platform in helping to transform the company. This transformation became more urgent in the face of COVID-19 with the workforce moving to work from home. In Q2, we saw a trifecta. First, the customer extended to our UCAS solution with 2,400 RingCentral Office users. Then, they further expanded their CCAS footprint by 60 agents. And finally, They consolidated all their digital point solutions to the RingCentral platform. It is great to see customers increasingly embracing the value of the full RingCentral portfolio. Today, the cloud transformation of communication is a top priority for every business to meet their enterprise needs at a global scale. With our enhanced focus On products, people, processes, and partners, we are in a strong position to be a core part of our customers' digital transformations and address the large opportunity ahead of us. I've been with DreamCentral for a little over six months now. I'm humbled by our vision, the company's commitment to innovation, and our incredible people-centric culture. I'm excited to be a part Thank you. Thanks, Anand, and good afternoon, everyone. Q2 was a solid quarter on multiple fronts. First, ARR for our flagship UCAS solution, RingCentral Office, surpassed $1 billion for the first time and grew 36% year-over-year.

Second, our overall subscription revenue grew 32% year-over-year, along with an overall operating margin of over 10%, demonstrating solid, profitable growth. This is a testament to the large opportunity and our consistent execution. Third, we are winning larger enterprise customers with a record number of seven-figure TCB deals, demonstrating how strong the demand is for our products in the COVID environment. ACO is off to a good start, voting well for the long-term opportunity. And finally, we announced UCAS exclusivity with Atos Unified, further expanding our global reach and complementing our existing partnerships. Businesses are turning the ring central as they transition workforces to a work-from-anywhere environment. Mid-market and enterprise customers, defined as 25,000 or more in ARR, had another strong quarter, with ARR up 50%. Underpinning this trend was booking growth from new enterprise customers with 100K or more in ARR, which was up over 50% sequentially. As it relates to our existing customer base, we mentioned in May that small businesses in verticals like retail, travel, and hospitality that account for less than 10% of our overall install base saw higher terms. But as the quarter progressed, the churn rate improved consistently, although still not at historical levels. With overall Q2 on solid footing, let's move on to our 2020 outlook. We are encouraged with recent trends, but in this crisis environment, we continue to make prudent assumptions for the remainder of the year. Given Q2's outperformance and our highly predictable recurring revenue models, we are raising Our annual guidance. We feel confident in executing to our plan. So now on to specifics. We expect subscription revenue growth of 28%, up from 25% to 26% previously. We expect other non-recurring revenue growth of 8% to 12%, reflecting customer engagement shifts from desktop phones to RingCentral apps on laptop and mobile devices. We expect total revenue growth of 26 to 27 percent, up from 24 to 25 percent previously. We expect non-GAAP EPS to be between 92 and 94 cents, up from 91 to 94 cents previously. This includes a penny impact from lower interest income. In summary, the global pandemic has provided a structural catalyst for UCAS adoption, and RingCentral saw stronger demand than ever. Even when COVID is behind us, which we hope happens as quickly as possible, we expect that the new normal for enterprise communication will be cloud first, as on-premise systems have shown to be inadequate for the needs of businesses. We believe that the market inflection is past the point of no return, and RingCentral is strongly positioned to take advantage of this trend. We have an industry leading product, a steadfast commitment to innovation velocity, as well as a global and diversified go-to-market reach. Our momentum with AT&T, progress with Avaya, and expansion with Atos further enables us to scale our market reach and add incremental layers of long-term profitable growth. With that backdrop, we are confident in our ability to lead in this $50 billion-plus UCAS market. Of course, this would not be possible without our amazing employees Submitted partners and loyal customers. So a huge thank you to all of them. With that, let me turn the call to the operator for Q&A.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2. if you would 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 keys. And once again, to ask a question, press star one on your telephone keypad. Our first question comes from Brian Peterson with Raymond James. Please state your question.

Thanks, gentlemen, and congrats on a really strong quarter. So, Mitesh, maybe I'll start with you. You know, given the large revenue, I think we're kind of used to seeing that, but... We actually saw a big beat on the bottom line as well. So maybe help us understand how you're thinking about the growth slash margin balance going forward as you guys head into 2020 and beyond.

Yeah, no, thank you, Brian. Yeah, the quarter did progress. As you saw, we did beat the quarter pretty handily. The quarter did progress better than we expected initially throughout the quarter. A lot of the dominoes did fall our way there. So yeah, you're right. So we did beat the subscription revenue by about $11 million, and then a $5 million of that fell to the bottom line. So close to a 50% margin flow through from the revenue. It really, again, speaks to the unit economics and the inherent leverage we have in the business model, where you can treat this 50% incremental revenue margin as a proxy for our install-based recurring margin. So really strong unit economics there. And the playbook, Brian, is going to be very, very similar to the way we have been executing, which is that we will thoughtfully deploy this upside towards innovation and go to market for growth. But meanwhile, we will stay very disciplined with a focus on profitable growth, as we have been, and promise expansion of 40 to 50 basis points of margin expansion per year.

Thanks, Mitesh. Maybe a follow-up for Vlad. I know you gave some perspective on RingCentral Video, but I guess we're a few quarters in with RCD. I'd be curious how you would gauge your progress so far. Thanks, guys.

Yeah, no problem. So, to be clear, we're one quarter in with RCD, so it's still early. Progress has been quite robust. We are actually seeing a good number of accounts on RCB now. It's around 10,000 paying accounts at this point. And most new customers are now getting RCB. As we stated when we first launched the product, we expect overall customer base to migrate from RingCentral Meetings, which is powered by another provider. to migrate to RCV all the time. So that's still the plan. And we are working very hard on making this decision very positive and an easy decision as the product matures.

But so far so good.

It's performing well.

Good to hear. Thanks, Clay. Thank you. Our next question comes from Bhavan Suri with William Blair. Please say your question.

Hey, guys. Can you hear me okay? Yeah. Yeah. Perfect. And congrats. Solid quarter, gents, all the way around. I have two questions. Maybe first for Mitesh. Mitesh, you know, you've got a lot of puts and takes here. You've got really solid growth, over 100K. You've got churn improving. Can you highlight the puts and takes of the quarter and what drove the opposite? I'm trying to say the puts and takes through the quarter. I've got a quick follow-up.

Yeah, sure, sure, Bhavan. So I would say a couple of things. Two, call it maybe three points. So on the quarter, we saw, let's start with new logo on the very top. So we did see strength across the board on new logo. If you look at the enterprise segment, 50% sequential growth is what we saw. So really good strength there. Even in the TCV deal for 1 million, we saw 70% of that came from new logos. So that's sort of point one. Point two, on the deal sizes itself are getting larger. and the third one I'd say is customers actually are adopting for longer duration. So those are two or three points on the deal momentum. If you look at the go-to-market side of it, we are seeing a lot of strength from the channel partners as well, which we grew 60% ARR. So if you just combine it all, if you look at the takeaways for these trends, there are a couple of takeaways I would say. One is Customers are comfortable with a long-term commitment to UCAS during this environment. Second is, you know, that COVID is becoming a structural positive for us, for RingCentral. And the initial fear, at least when we were modeling the year, was that, hey, there could be this panic buying in Q1 and then the demand fades. We are not seeing that head phase. That's point two. And third is with the demand trend we are seeing, we are definitely adding much higher lifespan value customers. with a lot of potential to land an expense.

That's really helpful. And at some point, it would be great if you revisited the LTV tech at the high end of the enterprise. But my second question is for maybe all of you on , et cetera. Microsoft obviously announced Friday or maybe late last week that they're suspending some of their core features around carriers, around distributing calls, about managing that. They don't want to be a carrier anymore. and they said it indefinitely. Obviously, you also announced integration with Teams. And so, look, I view it as a massive positive, but honestly, I'd love to understand how you all think about what Microsoft announced and the Microsoft partnership from a long-term perspective. I don't care in your turn, but as you view their stepping back from sort of competing with carriers and integration of RingCentral with Teams, Vlad, Anand, how do you guys think about what that means for RingCentral over the next few months?

Yeah, yeah. Vlad, go on. Yeah, no, no, hey, Vaman. Yeah, look, let me do high level, and obviously, Anand, you know, being fresh from Microsoft, we have said to this. Look, at the high level, we think that Microsoft could be a long-term strategic partner for us. We do feel we're bringing complementary strengths toward moving customers' communications from on-prem to the cloud. Obviously, we're very, very, very strong in the phone system side of the equation. We speak of MVP, so Message Media Phone System.

And that's kind of where they push down, right, to be clear?

No, but I'm saying outside from the central, right? And Microsoft, again, you know, you need to talk to them directly on, you know, What their strategy and goals are, but from what we can tell, they're very, very strong on the messaging side with Teams, and, you know, Lasso was strong in particular. So, at the high level, it seems it's a positive for us, hopefully positive for the customer as well, but, you know, how the market exactly will take it, I mean, we'll have to see. I'm a very concerned about this.

Well, you said it all, Vlad. I mean, for us, it's very simple. As Vlad said, you know, the details, you guys should talk to Microsoft. But we are doing, you know, for them, you know, direct routing was great. It gives their teams, customers, access to the best, you know, phone system in the industry. And on top of it, we are investing more in extending that wide mode of enterprise feature debt for what is already a best-class system. So net-net, you know, Do you feel good about it?

That's a good idea. I would like to resign, but I won't. Thank you, Jen. I appreciate it. Congrats. I'll pass on. Thank you.

Our next question comes from Nikolai Beliov with Bank of America, Merrill Lynch. Please state your question.

Hi, my first question is to Mitesh. Congrats on the results here. These two results came in line with our field check, and also it was worth pointing to your own pipeline. And Mitesh, I noticed the guys who picked you in the rest of the year was maybe a little bit more conservative than took you. Just wondering if you can walk us through what you're seeing, what trends you're seeing in the pipeline, or turn, or new business that causes you to be a little bit more conservative in the last quarter.

No, sure, sure, Nikolai. Yeah, so let's start from the top. So the assumptions, overall assumptions, right, for what we've made is that the macro does not significantly get better than what we experienced in Q2. And to a large extent, the lockdown does continue. So that's the overall thematic assumption. Now, if you take a click below for guidance, as you pointed out, a couple of things. What we have assumed is that the productivity for our sales people or sales force does not improve. We saw quite the contrary trend in Q2 where we did see an expansion of our pipeline. We did see increased conversion rates. But given the prudent assumptions we always take, we have assumed lower close rates on our pipeline. So that's point one. And point two, as you also asked on churn and red retention, We've made more conservative assumptions in the back half than we saw exiting Q2. Hopefully, you know, we'll do better than that and the world opens up better. But for now, we are making those assumptions. So we feel really good about, you know, the way we are guiding, and we feel good about executing to our guidance.

Thank you. And a follow-up for Vlad and Anand. Can you guys help us contrast and compare the quality of the install base of ATOS versus Avaya? and secondly, the cost to book new business versus, you know, comparing acres versus the buyer and your direct internal business. Thank you. That's it for me.

Okay. Let me take maybe the first part of the question. So, quality. Look, users are users. So, I don't know how you can say quality. But the one thing is with Atos is... Many more of their customers are direct engagements as opposed to through the channel. So one can think that perhaps, you know, it would be, I don't know if it's an easier motion, but maybe a somewhat shorter motion to get to those customers. Of course, there is the geographical dispersion as well, with most of Atos' customers being in Europe, in Germany in particular, and of course Avaya is a, you know, very international, still a US-centered company. But I have to say, when we were evaluating this opportunity and, you know, deciding to, you know, to As we've announced, it seems to be mostly, if not entirely, complementary to Avaya's base. Again, with both cases, the key theme here is converting existing on-prem users to the cloud while keeping their traditional brand affiliations. and in as much as users, you know, wouldn't see that there are too many, if any, customers who would use both Avaya and Atos at the same time. So from that perspective, it seems to be very, very complementary. And if Anand and Mitesh can add on some numbers.

Mitesh, can you talk about that? Yeah, I'll take that.

Yeah, okay.

Thank you. No, on cost of work, Nikolai, look, I think that's the key part, right? When we look at all these distribution engines, For these partnerships, our cost to book is lower up front because we don't have to spend the initial sales and marketing. Actually, alongside that, the other vector or the other side of the coin is higher lifetime value. Because these partners are incented to hang on to the customers, we are seeing not only lower cost to book, but also a higher lifetime value. So I think it's a two-pronged approach there.

Thank you, guys.

Thank you. Our next question comes from Sterling Audie with JPMorgan. Please state your question.

Yeah, thanks. Hi, guys. So, wondering, you mentioned the success and you're happy with the performance for Avaya, but specifically just want to check in on where you are on the ramp of things like the tools to help the acceleration of deployment migrations over to RingCentral. whether all of the channel trainings are complete. In other words, are you fully ramped or is there still a couple more milestones that we should be looking for to see even bigger contributions coming out of the partnership?

Yeah, let me take that. So in Q2, we actually – so we've been at migrations for a while, as you can imagine, even before the Avaya partnership was done. But in Q2, we actually delivered more automation on the migration scripts. So as far as migration scripts go, I think we have, you know, fully deployed that, working with Avaya, and we feel pretty good about it. And then from a product standpoint, it's a journey. I mean, you saw that we launched ACO sort of 2.0. We launched it, you know, internationally in UK, Canada, Australia, and we launched it more broadly across Europe and H2. So that's a journey.

Got it. And then one follow-up question I made for you. Looking at the go-to-market motions that you have now, how much savings have you gotten on the travel, et cetera, from COVID-19? And how much of that maybe will you be able to hold on to permanently post-COVID, given the success you're seeing in the setup and the go-to-market motion you have now?

Yeah, no, I think it's hard to, you know, exactly quantify for you, although we have the exact numbers. But you look, we do have a lot of discretionary spend, not just travel, but events, customer events, employee events. All those are getting repurposed for R&D and go to market. So post-COVID, yes, I mean, this is going to be a wake-up call for all companies to make sure we look at all discretionary spend and tighten the belt. So a fair amount of discipline is going to go on, and I think we'll see some more leverage going forward.

Got it. Thank you.

Thank you, Sterling. Our next question comes from Terry Tillman with Truist Securities. Please take your question.

Yeah, good afternoon, gentlemen, and congrats as well for me on the quarter and the outlook. I guess maybe the first question is, as you're further into the opportunity with Avaya, what have been some of the early learnings, and how do you see this opportunity playing out as it relates to actually driving ARR either this year or next year compared to just months ago? And then add a follow-up.

Yeah, I'll take the first part, and I'll let Natasha answer the second part of it. The first part, you know, early progress is great. We onboarded, you know, 2,000 plus partners. The pipe is very healthy. And, you know, in as little as a quarter, we had several large deals in Q2, which feels good. And it's broad. You know, we had wins in retail, higher ed, manufacturing, the BPO space. So it's a broad, you know, vertical landscape. So, all the fundamentals are good, as we expected, and it continues to be for the second half as well. Mithush, I'll let you answer the second half on the financials.

Yeah, no, now the CFO is trying to temper expectations. Thank you, Anand, for doing a marvelous job there in setting great expectations. No, all good what he said. Look, in terms of the contribution for the quarter, We are a billion-dollar revenue business, so it doesn't quite move the needle, so it was immaterial in terms of contributions for this quarter. And no change to the expectations. We do expect the ramp to start to take hold in Q4 of this year and then continue to in 2021. Okay.

And, Mitesh, I think in your prepared remarks, I like this phrase, layers of growth. So whether it is Avaya, Atos, AT&T, Microsoft Teams Integration, Engage, I'm sure I'm forgetting about five or ten of them. But investors ask us lots of questions because they're curious about these opportunities. How do we frame this as it relates to maybe the growth profiles when we move into next year? And, you know, do some stand out more than others? Just a little bit of help on all these catalysts, kind of confluence of all those catalysts. Thank you.

Yeah, no, I'd say it's, yes, Terry. So, yeah, we do have multiple catalysts going on, but if I can summarize these catalysts in, let's say, two buckets. Bucket number one is expansion of market, and bucket number two is strategic partnerships. Both are cutting the ramp this year. So, if you look at the move of market, if you look at the booking for mid-market and enterprise, over 60% of our Office Booking came from that segment. We also announced a 100,000-seat win from Atos. And I will tell you that we have more deals of this size in the pipeline. Timing of these large deals is unpredictable, but customers are evaluating RingCentral for a work-from-anywhere environment. I will tell you that. So that's sort of bucket number one, which is expansion, more expansion of market. And second is let's lump these things together into partnerships. Avaya, AT&T, Autos. I mean, the play there is expanding our reach to a broad PBX install base. That's one. International diversification is the second one. And Nikolai asked about the cost of acquisition. It does lower our cost of acquisition. So I think these are the two big long-term layers of growth. And, you know, the way we are thinking about this business is it's an organic distribution strategy for us. So going forward, we'll give you color on each and every partnership Thank you.

Our next question comes from George Sutton with Craig Hallam. Please state your question.

Thank you. I wanted to poke a little bit more at the international expansion opportunity. As you're obviously working with a growing list of both strategic and channel partners around the world, Can you give us a sense of kind of where you are and what you see as the duration of growth opportunity? How are you planning to expand outside of the U.S., either through these partners, through your own traditional organic growth means? I think that would be helpful to understand.

That's a great question. I'll take that. So the first vector is our strategic partnership. That's where Autos Unified makes a big difference. and Ashu Varshney.

Curious, clearly on the distribution side with the Autosys and AT&Ts and the buyers of the world, you have a distribution advantage. I think what we get challenged by clients on a lot is trying to explain the advantage you have from a product perspective. And for years, Vlad's talked about out-investing everyone. I wondered if you could, in a world where everyone has a platform of integrated capabilities, how are you trying to define your unique capabilities? Competitive advantages on the product delivery side.

Thanks. Vlad, you want to take it?

So, you know, while Vlad is getting on, so this is how I would put it. We look at this broadly for us. You know, first, it is the different modes of message, video, phone, the whole platform coming together You know, phone is mission critical, and the level of enterprise feature that we are adding on the phone system is best in class. The second, as I look at it, is elements like the work we are doing on security, on user experience of unified application is a major product differentiator for us. The third thing I'd call out is just trust the fact that we – have been on five nines from a reliability and security standpoint for a few quarters now. Again, it makes a massive difference. And the fourth thing I would call out is just the international footprint, the geographic footprint we have of where global office is available and works natively is, again, there's a huge and wide moat around it. So all of these come together to make the product clearly differentiated But on top of that, you know, what also works is our ability to work with our partners to quickly create joint products, to quickly make sure that we can meet their security requirements, which are very stringent, as well. So those things then finally come together as the icing on the cake to make these partnerships, these distribution models work better than most.

Yeah. Let me just add to that. And Look, firstly, we do believe we have a differentiated platform. Message video phone. If you remember, George and others, for some time I was saying, well, hey, the only other provider out there with a similar fully encompassing vision is Microsoft. But with the latest news, you know, Friday and today, it seems that they would be de-emphasizing the voice part if we understand what they're saying. But outside of that, you know, the statements do fall. So we do have a differentiated approach in these modalities. Clearly, we are the strongest on the phone system side, and that keeps on caring today for us. Our wins with AT&T, with Avaya, with Atos, and just going in chronological order here, you know, are a testament to that. Do not underestimate our video efforts. We know we're in the lead now, yet, but I can tell you we're working very hard on it to close all gaps. So it will be getting incrementally better, and, you know, we'll be a world-class product. And, you know, our messaging is pretty good as well. So, net-net is far and long ways from being commoditized, but should we ever get to that point, you already said it, you know, we do have this inherent distribution advantage, and all things being equal, we think it will, you know, I don't know if it will carry today, but certainly will help, but all things not being equal, as they are not now, remember, our, from day one, you've known us, and Until now, our biggest issue is access. We win way more than we lose in head-to-head, you know, in head-to-head comparison or compete against the entire field. So where we don't win is where we're not at the table. And people like AT&T, people like Avaya, people like others should make those cases, you know, are a lot harder to find, to where we're not even at the table. And that's what we're banking on. And again, so far, so good. And especially, I think, on another dimension, we have quite a bit of effort in specifically making these partnerships to be much more turnkey, much more streamlined, and also much deeper, you know, with migration tools, with, you know, custom... Ladies and gentlemen, in order to get as many questions as we can during our remaining time, we ask that you do not ask a follow-up question when you queue.

Our next question comes from Michael Turin with Wells Fargo. Please state your question.

Hey there. Thanks. Good afternoon. Natasha, you're again, I mean, we've referenced it multiple times, showing strength across multiple key metrics. Even the AR growth in SMB looks like it picked up a little steam here. Can you maybe talk through some of the key factors driving that uptick? Has that one surprised us a bit more than some of the others here?

Yeah, no, I think it's a good observation, Michael. Yes, we did see I think the combination of these two or three trends is actually helping our taxing lower, But going forward, I think the right bogey to target is about 15-ish percent in the overall SMB space. But near-term trends do indicate that we are seeing some scheme in self-serving e-commerce.

Thank you.

Our next question comes from Samad Samana with Jefferies. Please, say your question.

Hi, good afternoon. Thanks for having my question. So, you know, I guess I just wanted to follow up on the Athos partnership. You initially announced a partnership with them at the beginning of 2020, and now this was a pretty significant expansion. I'm curious... Thank you for taking my question. Yeah. Go ahead, Adam.

I just answered the first part of the question, and then I'll thankfully delegate the second half. So the first half was just one, you know, the first few months of the partnership, the traction with the joint sales forces, we were a part of the digital workplace portfolio of Autos, and the message to their customers was resonating hugely. And then COVID happened. and so immediately they saw the difference this could make by extending it across the unified base as well. So both of those, the traction of the portfolio to their enterprise customers and then COVID came together. This extension only makes sense. And that's how, you know, I guess this happened. Pratish, I'll transition the rest to you.

Yeah, hey, Samad. So I think the second part is it's the scale that gets scaled, correct? and yes, it's a mix actually. We had some in the pipe. We're getting more with these partnerships. So I think it's starting to spin up a virtual circle for us here.

Thank you. Our next question comes from Will Power with Robert W. Barrett. Please state your question.

Okay, good. Thanks. Yeah, I guess I want to come back to some of the earlier comments on contact center, that being a key part of roughly 50% of your larger deals. I just wonder if Generally, if you could kind of characterize the demand you're seeing there and maybe just talk a little bit about the roadmap going forward to make sure you're positioned for that demand. Obviously, you've done a lot organically on the digital side, but do you need to do more and bring more of the capabilities in-house as opposed to partnering with InContact and others over time?

Yeah, it's a good question. I mean, our partnership with InContact remains as strong as it has ever been. and obviously we are, you know, investing in integrating Engage Voice and Engage Digital strongly into the RCO platform. So the product efforts are on as we have always shared with you guys. But as you look at the sales side, you know, simple things like, you know, last year we shared Arch Capital and the UCAS in there. So now, you know, we are basically seeing them, you know, not just deploy UCAS on an accelerated basis but They're also picking up on, you know, needing to deploy a strong CCAS solution. So that's where, you know, our in-contact partnership makes a difference because their integration, the voice quality of the RCO platform, the routing capabilities, all of it come together where, you know, ours capital extended the UCAS footprint to CCAS. You know, that's why you saw that, you know, a large percentage of our large deals also, you know, then become contact center deals. and that's a key thing. Going forward, I think companies are looking at CCAS and UCAS decisions and we feel we are well placed.

Okay. Thank you. Our next question comes from Amanda Marshall with Morgan Stanley. Please state your question.

Great. Thanks. Maybe just a question on how you're accommodating. You noted that conditions have improved throughout the quarter, but I would I guess that some of your customers are still a little stressed. So are you accommodating them with payment pauses or reducing seat counts, or has it caused any change to forward contract structures? Thanks.

Yeah. So, yes, both are true. We are accommodating. So customers are seeing a couple of things. They're seeing two trends. Trend number one is the payment deferrals. We did see customers approach us and more in April and then subsiding in May and June for payment deferral. So we are accommodating them and then in the books, we've taken enough appropriate reserves to cover for the exposure. And the second part we are seeing actually is an interesting one. It's a bit counterintuitive. We have seen one that you'd expect, that customers are not paying us up front for annual prepay. That's where you see some headwinds in deferred revenue. But in fact, customers are signing up for longer duration contracts which does bode well for the long-term structural growth of UCAS. So we are seeing those three trends, and this is how we've accounted in the guidance.

Got it. Thanks. Yep.

You bet. Our next question comes from Kash Rangan with Bank of America Merrill Lynch. Please state your question.

Hi. Thank you very much for the comments. Congratulations. I'm wondering if you guys have a perspective how long-term The lifetime value of a customer or subscriber will change as you have video. How does it change retention, output, uptake, et cetera? It's a high-level task there. Because you certainly agree with me that you have a very unique proposition, which is unlike Zoom and Slack in the marketplace. But how does this play out in the business model? Super long term. Thank you so much.

Yeah. Let me take that cash. Thanks for the surprise, Cam. You were safe there. So... If you look at the way unit economics, right, so it's driven by two things in my mind. One is churn, and second is upsell and net retention. Once we look at, if you lay around, you said two things. One is video and the product, and second is partnerships. So let's take video first, or the product itself. Given that we are expanding a platform with MVP, it does put in more barriers to exit and make our base stickier. which would be an inhibitor of churn, so reduced churn, which would help the lifetime value. That's part one. Part two, with the partnerships, again, lower cost of acquisition to get these customers, and again, because these partners are incentivized to keep hanging on to the customers, that means less churn and more upsell and retention, so higher lifetime value. So if you package it all together, long-term, our sustainable economic margins are going to be trending up higher than they currently have because of these two long-term trends.

Superb, as always. Thank you so much for this.

Yeah, you bet. Our next question comes from Rich Valero with Needham & Company. Please state your question.

Thank you. Let me add my congrats on nice execution of the quarter, gentlemen. Questions on AT&T. Sounds like momentum continues to build there, but the last couple of quarters you've given fairly specific insights Thanks, Rich. I'll take that. Again, classic, you know,

Again, in Wall Street, if you give a metric once, you've got to be prepared for giving it every single time. So I will say, yes, we did see strong bookings in AT&T again this quarter. We did see some increase in seller participation. And as to – so both trends, what you saw last quarter, did continue. We are seeing some traction in upmarket as well. AT&T was supposed to be, you know, initially an SMB play, but now we're seeing some upmarket there. And as it relates to the overall guidance, you called it, Rich, overall growth because of the install base still churning and our new booking is not quite offsetting that, just for the year, AT&T is turning to be less of a headwind this year, and I think it's going to start to dissipate in 2021. Got it.

Thanks, Pitesh.

Yeah, you bet. Thank you, ladies and gentlemen. That concludes today's conference. All parties may disconnect. Have a great day.