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Operator
Greetings and welcome to RingCentral's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the full presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Brian Goodman, Head of Investor Relations. Thank you. You may begin.
Brian Goodman
Thank you. Good afternoon, and welcome to RingCentral's third quarter 2020 earnings conference call. I'm Ryan Goodman, RingCentral's Head of Investor Relations. Joining me today are Vlad Shminis, Founder, Chairman, and CEO, Anand Eswaran, President and Chief Operating Officer, and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand, and Mitesh, followed by Q&A. Some of our discussions and responses to your questions will contain forward-looking statements, including our fourth 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 of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. With that, let me turn the call over to Vlad.
Ryan Goodman
Good afternoon, and thank you for joining our third quarter earnings conference call. We hope all of you are safe and in good health. I would like to start this call with a warm welcome to our newest board member, Ms. Mignon Clyburn. Mignon was an FCC commissioner for nine years, but she was committed to closing the digital divide. Prior to her federal appointment, Ms. Clyburn served 11 years on the Public Service Commission of South Carolina. Now, Turing Central. With a substantial part of the global workforce continuing to work from home, we see that cloud communication solutions are becoming a core tenet of business continuity. RingCentral's importance to our customers for their communication and collaboration needs continues to increase. Leveraging this megatrend, we delivered a solid third quarter. We saw continued strong adoption of RingCentral, as our customers are going through their digital transformation journeys. And the numbers are there to prove it. For Q3, total ARR grew 34% year-over-year to $1.2 billion. Customer mindshare grew at a level we have not seen before, with record new logo business up over 60% year-over-year. Additionally, we see pipeline expanding and macro-related retention metrics continuing to stabilize. Anand and Mitesh will provide more details. Underpinning these trends is a customer's clear need for a complete communication solution that combines all major means in which people communicate, message, video, and phone, or what we refer to as MVP. Individually, each mode, message, video, and phone, is important. But seamless integration across these three modalities is what makes RingCentral a standout in the enterprise cloud communication space. RingCentral MVP transforms transactional calls, messages, and meetings into a persistent system of record and engagement for all of enterprises' external and internal communications needs. Android Central does so elegantly and effectively, as is evident by our recent recognition from the prestigious Academy of Inactive and Visual Arts. We are proud and humbled to have won a W3 Gold Award in the General Website Application Service category and two W3 Silver Award for Best Visual Appeal Experience and Best Visual Appeal Utility. But superior user interface is just the beginning. It is the strengths of our well-proven, born-in-the-cloud platform that enables us to win with 5.9 reliability, world-class global coverage, deep feature capabilities, and an open platform. Building on these strengths, our innovation velocity continues to accelerate. On the video side, last quarter, we released over 70 new and innovative features, including additional security controls, waiting rooms, filmstrip viewing mode, in-meeting device switching, network quality indicators, and the dark mode, amongst others. We continue to rapidly innovate and carry a rich roadmap ahead. We also enhanced our open platform with fully integrated high-volume SMS capability. This enables our customers to use the RingCentral platform for SMS order notifications and appointment reminders without need for third-party CPaaS solutions. And importantly, we announced expansion of RingCentral Global Office across six continents and broadened our European platform presence to now include Germany with local data residency. This will allow us to better serve large international customers. COVID has been a tailwind for us as legacy on-premise solutions are now simply inaccessible by most employees. But let's look ahead. In the post-COVID world, we don't expect things to go all the way back to the way they were at the end of 2019. Businesses are already planning for a hybrid world where part of the workforce will continue to work from home for the foreseeable future. RingCentral is uniquely positioned to address this new world of work via a differentiated ecosystem of strategic partnerships with major on-premise system vendors, as well as a number of leading global carriers. To that end, we have some exciting updates that Anand will share with you shortly. In conclusion, our business has never been stronger, and we see tailwinds continuing. Our well-differentiated, global, secure, reliable MVP platform and unique ecosystem of strategic relationships give us preferential access to over 180 million users worldwide. or nearly half of the on-premise PBX install base. The cloud is winning, and RingCentral is winning in the cloud. And we believe the best is yet to come. Stay tuned for additional exciting announcements on both the technology and go-to-market funds. With that, I'd like to wish everyone a healthy and safe holiday season, and I will now turn the call over to our President and Chief Operating Officer, Anand Aswaram.
Mignon Clyburn
Thank you, Vlad. Good afternoon, everyone. Operationally, Q3 was a very strong quarter. We are seeing strength across all customer segments. We have strong momentum with new logo wins and upsells across our unified communications and customer engagement portfolio. Let me begin with a few highlights. First, channels continues to be a key driver of our upmarket success. Channel ARR increased 59% year-over-year to $419 million. Second, our carrier partners delivered strong results that exceeded our expectations. Third, for strategic partnerships, we are pleased with early success and the way Avaya and Atos our rampage on sales enablement and joint pipeline building. I'd also like to warmly welcome Alcatel-Lucent Enterprise as a new strategic partner. Fourth, our unified experience, MVP, proved to be an important differentiator for our top customer wins. Of our top million-dollar-plus QCV wins in Q3, roughly half cited integrated video, messaging, and phone as the key influencing factor in their decision to go with RingCentral. And fifth, we are seeing great return on our investment in innovation and geographic expansion. Our open platform ecosystem and global reach position us to uniquely serve the needs of large international companies. Let me just dive into the details. First, channel. A strong presence in the channel community provides us valuable customer mindshare at scale, and our channel network continues to grow at a record pace. One example of a standout channel win in Q3 is with Cornerstone OnDemand, a global leader in people development solutions. Cornerstone needed to replace legacy on-premise systems with a global unified communications platform. Our high reliability, open platform, and complete MVP solution enabled this customer to deploy Ransom Central globally across 20 countries and over 2,500 users, and additionally provided them with significant savings. Second, our key carrier partners. Telus had a strong quarter with new logos and upsells. We are expanding our partnership to include new market segments and products, including contact centers. For AT&T, we continue to see strong performance with new business up triple digits year over year, led by expansion into upmarket. This acceleration is a direct result of RingCentral becoming AT&T's lead UCAS solution late last year. Building upon this success, I'm excited to share that earlier today, we announced an expanded partnership with British Telecom. Under the new agreement, cloud work provided by RingCentral will be a lead UCAS and CCAS offering for BT business, and public sector customers. On strategic partnerships, let me start with a wire. We continued our ACO rollout with ramping customer width, partner sales participation, and geographic coverage. Over half of our Q3 ACO new business came from upmarket customers. We are seeing robust ACO pipeline growth and we are pleased to see some of the larger ACO wins in Q3 coming from targeted verticals like healthcare and education. With Autos, Unify Office by RingCentral was launched in August in seven European countries. We are particularly pleased to see large-scale early wins, including an eight-figure TCV deal in the first month of launch. And we are delighted to have Autos choosing Unify Office by RingCentral as its go-forward solution, starting with 30,000 users across 20 countries. Our partner ecosystem provides us with a unique go-to-market mode. And our differentiated family of integrated UCaaS and CCaaS solutions creates lasting customer value. A great example of an integrated UCAS and CCAS win was with Heartland Dental, one of the nation's largest dental support organizations. This longtime RingCentral customer expanded to 10,000 UCAS users and added its first 200 Contact Center users in Q3. By adding RingCentral Contact Center Heartland Dental will be able to run end-to-end analytics of patient calls from the contact center to their local offices. We also had a large win for Engage Digital, RingCentral's digital customer contact center platform with CNAM, a French government organization that manages national healthcare branches. Importantly, CNAM is also planning to use RingCentral Video or RCV. That, in conjunction with Engage Digital, will provide CNAM with an integrated platform to connect with policyholders and healthcare professionals. Examples above and many others illustrate the importance of a global solution to our customers. A big differentiator for RingCentral Global Office, which is now available in six continents, is full local regulatory compliance and security. This was key to a large Q3 win with a multinational software company. Since first piloting RingCentral in 2019, this customer has expanded to 16,000 UCaaS users and over 1,300 contact center agents across 40 countries. Along with global expansion, another key initiative at RingCentral is meeting the needs of key verticals, such as healthcare and education. I've already mentioned an important win in healthcare, and let me now share one in education. In Q3, we secured a 6,000 user win with the University of Tennessee, North Dakota. our industry-leading unified MVP solution and mobile-first platform were all critical to meeting the needs of this university. In addition, the integrations we have developed with the Canvas learning management system as part of our vertical market initiative was an important differentiator. While we have talked about our unique distribution network, global reach, and an extensive feature set, It all starts with trust. Trust is the first principle at RingCentral. And in the current environment, reliable, secure, trusted communications are paramount. We are humbled that RingCentral's solution has played an important part in helping COVID contract tracing in the UK. I am incredibly proud of our accomplishments this quarter. We are scaling the business effectively with vision and discipline. With a large market at an inflection point, the strength of our brand, technology platform, and unique partnerships gives us confidence in our future. And now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.
Vlad
Thanks Anand, and good afternoon everyone. Q3 was a standout quarter on multiple fronts. Here are some key highlights. First, overall subscription revenue grew 33% year-over-year, accelerating from 32% in Q2. Second, non-GAAP operating margin of over 10% was up about a point year-over-year, and non-GAAP operating cash flow margin of 15% expanded 350 basis points year-over-year. This speaks to our philosophy of profitable growth and demonstrates the inherent leverage in our business model. Third, ARR, for our flagship UCAS solution, RingCentral Office, grew 36% year-over-year to $1.1 billion. And finally, mid-market and enterprise customers had another strong quarter, with ARR up 49% year-over-year to over $600 million. Key drivers for these strong results include strong momentum in enterprise with new logo wins and upsells, stabilizing COVID-related churn trends across the business, and contributions from our strategic partnerships voting well for the long-term growth and margin opportunity. Starting with our enterprise momentum, our business from new customers grew triple digits year over year, a significant acceleration from recent quarters. Contact Center is seeing a strong attach rate with our larger UCAS win and is an important driver of growth. Our structural shift upmarket is essential in fueling our continued land and expense strategy for years ahead. Case in point, new bookings from existing customers accounted for over 40% of upmarket bookings, demonstrating growing mindshare within the base. Along with strong new business, we also saw our overall COVID-driven churn stabilize at similar levels to Q2 and was better than we had contemplated in our guidance. As to our partnerships, we are pleased to see early contributions from Avaya and Atos, as well as strong results from our carrier partners, most notably from AT&T. As more users from these partners come online throughout next year, we expect strong incremental contributions. These will, of course, first show up in ARR before meaningfully contributing to subscription revenue in ensuing quarters. Momentum from Q3 continuing into Q4 and with building structural tailwinds give us confidence to deliver a strong finish to 2020. As an early read, Q4 is also a good start with robust new logo momentum along with continued strong pipeline generation and a healthy coverage ratio. With that, we are raising our annual guidance for 2020. We are increasing our subscription revenue growth to 31% up from 28% previously. We expect other non-recurring revenue growth of 10% to 12% reflecting customer engagement shift from desktop phones to RingCentral apps on laptop and mobile devices. We are increasing our total revenue growth to 29% up from 26 to 27% previously. We expect non-GAAP operating margin of 9.7%, which is at the top end of our prior range. We are increasing our non-GAAP EPS to 96 cents up from 92 to 94 cents previously. In summary, we are seeing multiple catalysts for our profitable growth to continue long-term. Macro indicators for churn and retention are stabilizing. We are forging long-term relationships with our customers. Our diversified go-to-market strategy is bearing fruit with early important wins from Avaya and Atos. AT&T and Telus are showing solid new business growth. BT is further doubling down with RingCentral as a lead offering. Alcatel Lucent Enterprise is on track to ship early next year, and further international expansion remains to be unlocked, especially with the help of our strategic partners. Also, expect to hear about additional new initiatives on both the product and on the go-to-market front that further expands our already diversified growth vectors. Businesses are now shifting focus from stopgap fixes to long-term solutions. They require platforms that enable productive work from any of those workforces that will persist in a post-pandemic environment. And RingCentral is at the forefront of the journey. We are still in the early innings of the RingCentral story, and we are confident in our ability to thrive in this $50 billion-plus UCAS market. With that, let me turn the call to the operator for Q&A.
Operator
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation will indicate your line is in the question queue. You may press star two 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. One moment, please as we call for questions. Our first question comes from the line of Terry Tillman, which was, please do with your question.
Terry Tillman
Hey, Vlad, Anand, and Mitesh. Congrats on the quarter. Maybe, Mitesh, first question for you just relates to, you know, the traction and the kind of programmatic approach moving up market. Maybe a little bit more financial color in terms of the million-dollar deals in the quarter. And, you know, how are you thinking about fourth quarter in terms of exposure to large million-dollar-plus deals? And then a follow-up.
Vlad
Sure, Terry. Hi. Sure, Terry. So, yeah, so question on how million-dollar – deals are doing in Q3 and how Q4 is shaping up. So let's start with Q3 first. I'll touch upon a couple of areas. So for the million-dollar deals, in terms of the dimensions of the deal itself, so the average size of the deal and the duration, we saw an increase on both these dimensions sequentially. That's one. And the strength was broad-based in terms of where the deals came from. So 80% of these transactions were new logos. A channel accounted for more than 60% of these deals. And in these deals, half of these deals had contact center, an element of contact center in them. So across the board, very broad strengths. In terms of Q4, how it's shaping up, if you look ahead, The first month of Q4, it's a fast start. We've booked about twice the number of million-dollar deals compared to what we had in the first month of Q3. And in terms of the deal size as well, the total value of all these deals in the first month is up about four to five times more then the total value we booked in the first month of Q3. So all in all, we are seeing this momentum continue into Q4. So overall, I feel that this whole structural shift of RingCentral being a work-from-anywhere play is turning out to be a good catalyst for us.
Terry Tillman
That's great. That's great, Keller. Thank you. And just to follow up, I don't know if this is for Vlad or Anand, but You know, like if you just do the simple math, which I'm good at simple math, I mean, you all have several million-plus users. I don't know if you've given any update or would think about giving us an update. But now you have access to 180 million users potentially with these strategic partnerships. You know, trying to understand kind of how captive of an audience that is, what's their propensity to stick with their existing partner and use the Ring Central Powered product maybe versus going in a different direction. what kind of signals, I know it's early still, but what kind of signals are you seeing around the stickiness of those relationships those partners have in order to kind of keep them as a customer as opposed to going to some other cloud platform? Thank you, and congrats again.
Mignon Clyburn
Well, that's a great question. This is Anand, and I'll take the question. Great to talk to everyone here. So we feel pretty good about the stickiness across our partners. In fact, if I were to tell you what were the top three highlights for me in Q3, one of it I would have started with partners across Avaya, across Atos, across AT&T, BT, TELUS. And we are seeing record growth with our carrier partners on new customer acquisitions. We are seeing record growth on upselling. And we are seeing great momentum across all the fundamentals with, you know, whether it be, pipeline, whether it be large deals, whether it be our transactions quarter-on-quarter with Avaya and Autos. So, net effect, my answer to your question is our fundamentals tell us we feel pretty good about our strategic partners, our carrier partners, taking us to the next level on our joint partnership.
Operator
Our next question comes from the lineup of answers with William Blair. Please stay with your questions. Hey, guys, thanks for taking my question.
William Blair
And let me echo Terry. Nice job there. Let me start off maybe with a contrary to Terry's question, which was upmarket. Let me go the other direction, because you had amazing upmarket strength. Really fantastic. But if I do some math, too, the SMB market actually looks like it grew really, really well. Really great strength in the SMB. Again, you're not an SMB company. But Mattesh, just some color on what's driving that, both from a go-to-market perspective and financially perspective. around the sort of re-acceleration, what I gather, in the SMB space?
Vlad
Sure, Bhavan. Yes, we did see strength across the board, and yes, you're right. SMB did perk up and did show an acceleration again in the third quarter. So to set the table, compares were definitely easier from last year, if you look at last year. But that said, despite the compares, a couple of things are happening under the hood. So I'll touch upon three or four dimensions here. The first one is that we are seeing very strong traction in e-commerce. That's one. Second is the recent branding we've done and RingCentral becoming a name of work from anywhere is taking off. The third dimension is contribution from Avaya and AT&T and some of our other carrier partners. And the fourth one is churn, macro trends are stabilizing. So all these four things came together for a perfect storm for SMB to take off. Now, if you look at what it means, is that it's a stronger motion in SMB with a lower CAC. And this highly profitable SMB business
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