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spk02: Good day, and welcome to RingCentral's third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ryan Goodman, head of investor relations. Please go ahead.
spk23: Thank you. Good afternoon and welcome to RainCentral's third quarter 2021 earnings conference call. I'm Ryan Goodman, RainCentral's head of investor relations. Joining me today are Vlad Shmunis, founder, chairman, and CEO, Anand Aswaran, 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. Accompanying today's presentation are slides being shared via webcast. The link is available at our investor relations website at ir.ringcentral.com. For those listening via telephone dial-in, I would encourage you to also join the webcast and select the listen by phone option. Some of our discussions and responses to your questions will contain forward-looking statements, including our fourth quarter and full year 2021 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. In particular, we continue to be impacted by the COVID-19 pandemic and its effects on our business will depend on the severity, duration, and extent of the pandemic and actions taken by governments, businesses, and consumers in response to the pandemic, 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. Please visit our Investor Relations website to access our earnings release, slide deck, our GAAP to non-GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available, as discussed in detail in the slide deck posted on our Investor Relations website. With that, I'll turn the call over to Vlad Shminis.
spk10: Vlad Shminis Good afternoon. and thank you for joining our third quarter earnings conference call. I'd like to start by thanking Mitesh for his valuable contributions to our company over the past decade as RingCentral grew from a little over $50 million to now over $1.6 billion run rate. Since stepping in as a CFO, Nearly five years ago, Mitesh has been instrumental in driving consistent profitable growth and outsized shareholder results. We will certainly miss seeing and working with Mitesh on a day-to-day basis, but he has left his mark on this term with a very strong foundation and an exceptional finance team that I am confident will carry the torch forward.
spk11: We wish Nitesh all the best in all of his future endeavors. With that, on to Q3 results. Third quarter results were outstanding.
spk10: First, subscriptions revenue increased 38% year over year to $385 million. This is an acceleration of 5 points year over year second ring central total arr increased 39 year over year to 1.6 billion dollars this is an acceleration of five points year over year of a base of over one billion dollars and third leading our ar growth is enterprise aaron which includes customers generating $100,000 or more in ARR and this is our fastest growing segment. Here we grew 53% year-over-year to $653 million. This is an acceleration in growth of 8 points year-over-year and demonstrates our strong growing traction with large-scale customers. This strong result speaks to our continued success in capturing the $100 billion-plus market opportunity of on-premise PBX users migrating to the cloud. This massive opportunity does not include the near adjacency of Cloud Contact Center, another successful ring-central solution, which adds an additional tens of billions of dollars in total addressable markets. Today, industry research estimates the addressable market cloud penetration is still at less than 10%. This means there are hundreds of millions of employees at the cost of a generational transformation to the cloud. RingCentral is at the forefront of this wave of digital transformation and is a well-established leader in this market. This is further evidenced by our strong consistent execution and financial performance. On that note, we are proud to once again be recognized as the leader in the latest Gartner Magic Quadrant for Unified Communications as a Service worldwide report for the seventh year in a row. In the report, RingCentral was positioned first for completeness of vision in the leaders quadrant. In addition, RingCentral ranked number one in three out of four Gartner critical capabilities for unified communications as a service. These use cases include large enterprise, midsize, and UT with integrated contact center. this builds on our success with idc austin sullivan and others earlier this year so why doesn't central win it's about trust innovation and partnership or what we like to call tips it all begins with trust trust is not just a feature it's a commitment ucas is a live blood for both internal and external communications for businesses worldwide. Reliability, security, and data privacy are table stakes, especially with larger enterprise customers. RingCentral's track record of delivering five nines uptime for over three years and counting is unparalleled. This equates to around five minutes of downtime a year, including maintenance windows. This is literally a hundred times better than the three nights or close to nine hours of downtime per year that some of our competitors provide. Next, innovation. RingCentral has always been committed to a rapid space of innovation. Our years of outsized R&D investing in a modern, scalable cloud-based architecture have enabled us to meet the stringent requirements expected of a leading enterprise communications system. Expanding on this differentiated platform, we continue to enhance our customers' user experience with many new features and capabilities across the platform. These include mobile heads-up display, call-to-video, Microsoft Teams embedded dialer, as well as multiple new RingCentral Room capabilities. This high level of innovation is driving favorable trends in customer app engagement. Let's take a closer look at the various modalities. First, voice is alive and well, with almost all of our customer accounts continue to leverage our phone and pbx capabilities next 45 percent of our customer accounts engage with both messaging and phones and finally 42 percent of our customer accounts engage with both media and phones overall approximately 60 percent of ring central customer accounts are engaged with more than one modality of communication. This deep level of customer engagement across all modalities is a reflection of the innovation and investment we have made in the RingCentral MVP platform. This rapid pace of innovation is also driving strong adoption of RingCentral DBA. We have now upgraded over 70% of our accounts to RingCentral BDO, and ongoing migrations are proceeding strong. We are also finding ways to leverage platform innovation to open up new opportunities with our partners, the third pillar of our SIPP strategy. One such example is the new service provider platform we developed named RingCentral-Rise. This platform will streamline the process for new carrier partners to work with RingCentral and will provide additional color on resources. As for the strategic partners, which include Avaya, Atos, and Alcatel-Lucent Enterprise, we are pleased to see strong incremental contributions and multiple $1 million plus EPD wins during the quarter. And on that note, I'm very excited to announce our newest strategic partner, Mitel. Mitel is a global market leader in business communications with over 35 million VC users worldwide. Mitel has an extensive network of thousands of channel partners servicing customers across the globe, who are largely incremental to our existing channel. Earlier today, we announced that WinCentral is now the exclusive UCaaS partner for Mitel. A differentiated digital transformation path will be provided to Mitel's installed base of over 35 million users. And this will be based on the newly acquired cloud link technology. The key differentiated feature of this new partnership is that Mitel's users will be able to utilize RingCentral's cloud-based video and team messaging capabilities alongside Mitel's on-premise technology. This will be provided via RingCentral's unified MVP app and administrative portal. Mitel's on-premise PBX users will then be able to migrate to RingCentral's full cloud PBX at their own pace, which is a path that is unique in the industry. Also, we have clear feedback from the field that, given our well-established industry leadership position, customers now prefer to see RingCentral as their primary cloud communications brand. As such, RingCentral will be the go-forward brand for all cloud technology for Mitel customers. In summary, this new strategic partnership brings together two well-established leaders in business on-premise and cloud communications, respectively. Utilizing Cloud Ring technology, an innovative cloud migration path will be provided to Mitel's customer base of over 35 million users, commencing in second half 2022. Please note that CloudLynx is not restricted to Mitel install base, but may also offer the possibility of extending a similar flexible migration path to other on-premise 3DS users at a later point in time.
spk11: In conclusion, Q3 was a great quarter for RingCentral. The results speak for themselves.
spk10: The communications market opportunity is massive, and we believe we are in the early stages of a once-in-a-generation global transformation. Our success is rooted in our commitment to building trust with our customers, our relentless pace of innovation, and our differentiated ecosystem of strategic partnership with industry leaders. Based on these principles, we've built a company that we believe is in a position to continue its leadership position for years to come. With that, I'll turn the call over to our President and Chief Operating Officer, Amin Eswaran, for additional color on the quarter and the underlying growth drivers. Thank you.
spk09: Thank you, Vlad. Good afternoon, everyone. We had an excellent Q3 across the board. Our growth is accelerating, the pipeline is expanding, and the partnerships are ramping. On today's call, I'll focus on four key growth drivers that both contributed to the strong Q3 performance and reinforced our confidence in our ability to continue leading the cloud communications market. First, partnerships, where our strategic and carrier partner contributions are ramping, and our channel continues to deliver strong growth. Second, international, with a record number of million-dollar-plus CCV wins. Third, upmarket customers, where we see strong momentum. And fourth, integrated UCaaS and CCaaS, which is driving new customer wins and upsells. Let me now dive into some details. Let's begin with the strategic partners. In Q3, Avaya Cloud Office by RingCentral delivered solid growth with both new logos and migrations from the install base. Contributions were particularly strong in our upmarket segment. Together with Avaya, we secured a new 3,500 plus user retail win across 240 store locations that replaced multiple legacy on-premise systems. We also won Medical West Hospital, migrating an Avaya on-premise solution to Avaya Cloud Office with 1,400 lines. We also had strong contributions from Atos. An example is a great win with a Global 2000 chemical manufacturer in Europe. who is upgrading approximately 3,500 users to Unify Office by RingCentral. And as for Alcaton-Lucent Enterprise, our channel enablement and training work is on track, and we expect this partnership to start contributing next year. And last, but certainly not the least, I'd like to extend a very warm welcome to Mitel, our newest strategic partner. These strategic partners collectively account for approximately half of the global market opportunity. Our partnership network creates a significant go-to-market mode for RingCentral in terms of both market reach and cloud migration process. This is evident in the accelerating growth we are seeing in our direct and partner office ARR. As for global service providers, key partners including AT&T, BT, and Telus delivered strong contributions. Our partnership with Verizon Business is also off to a great start. We are pleased to share that we already have multiple enterprise wins in our first quarter working together. As Vlad mentioned, leveraging our years of experience with global service providers, we are also excited to have recently launched our RingCentral RISE platform. It stands for Resources, Innovation, system integration, and experiences. RISE provides a differentiated plug-and-play platform for global service providers to offer co-branded new cash solutions and accelerate their customers' cloud transformation. Several new partners are already deploying RingCentral RISE, including Ecotel and MCM, and we are excited at the incremental opportunities this opens up in the future. Next, our channel partners continue to deliver strong results. Channel ARR increased 50% year-on-year to $626 million. Our channel partners provide an important and effective go-to-market motion in reaching larger customers across multiple verticals. Case in point, channel and partners once again contributed over two-thirds of our million-dollar-plus TCV wins. This included a great win with a large US public school district that more than tripled its RingCentral MVP footprint to 16,000 users across approximately 500 locations. Our diverse partner network is enabling us to efficiently scale our market reach to meet the rising global demand. International is already a strong tailwind to growth, and at just 12% of total revenue today, remains a large opportunity ahead of us. With key international partners like Altos, Alcatel Lucent Enterprise, Vodafone, and Deutsche Telekom to name a few, we are well positioned to capitalize on this opportunity. We had a major international milestone during the quarter where we became the first global cloud provider to be granted a unified license by the Indian Department of Telecommunications. Building on this achievement, we had a great win with Allscripts, a global leader in healthcare IT solutions. This customer more than doubled its RingCentral implementation with a 3,500 user global expansion across India and six other countries. The partner, channel, and international strength are all contributing to our robust underlying mid-market and enterprise growth. Upmarket win rates are holding steady, and with the pipeline at a healthy level, we are in a good position to close the year strong with continuing upmarket momentum. As we continue to expand our upmarket traction, we are seeing higher demand for our integrated UCaaS and CCaaS solution, leveraging our recently expanded partnership with Nice in Contact. Integrated CCaaS is a natural upsell for many of our enterprise UCaaS customers. To that end, Contact Center contributed to over 60% of our million-dollar-plus TCV wins. In addition, when we sell an integrated UCaaS and CCaaS solution, we are seeing much higher UCaaS ARR per account versus those with standalone UCaaS. These dynamics are resulting in customers standardizing on RingCentral for both UCaaS and CCaaS. In conclusion, Q3 was a great quarter, and as Vlad highlighted, it all comes back to our commitment to trust, innovation, and partnerships. These remain core tenets embedded throughout our organization, and we believe are the key drivers for our ongoing success in this 100 billion plus market opportunity. With that, as I turn the call over to our Chief Financial Officer, Mitesh Dhruv, I want to just pause and thank him for his partnership, friendship, and huge impact on RingCentral's journey and success, and wish him the best of luck moving forward. Over to you, Mitesh.
spk17: Thank you, Anand. Good afternoon, everyone. We had a record Q3. We had the best growth rate in over seven years when Ring Central was seven times smaller. This speaks to the market opportunity, the unique modes we've built, as well as our consistent track record of execution. Subscriptions revenue grew 38% year over year, up five points from the prior year. And non-GAAP operating margin was 10.5%. demonstrating the leverage in our model, especially as our partnerships start to scale. This, again, puts us close to the rule of 50 on a subscriptions revenue run rate of over $1.5 billion and is an important measure of our profitable growth success. The exceptional growth we saw is a function of four underlying drivers, partnerships contribution, international growth, upmarket strength, and net retention uptick. First on partnerships, we are seeing ramping contributions. This is evident in our direct and partner ARR, which grew 37%, up from 34% last quarter, and a 12-point acceleration from last year. On that note, I'd like to extend a very warm welcome to Mitel, which will add yet another engine to our future growth. Second, international revenue growth significantly outpaced our overall growth. Nearly one-third of our million-dollar-plus TCP deals came from international wins. As new international partners come online, this presents a large incremental untapped opportunity ahead of us. Third, we are seeing continued strength in mid-market and enterprise customers. Customers are demanding platforms that can bring together phone, video, messaging, and contact center to meet the needs of increasing hybrid workforce environments. RingCentral's MVP platform and our tightly integrated best-of-breed UCaaS and CCaaS are serving as a key differentiator. Our mid-market and enterprise business is now approximately a billion-dollar business, making up about 60% of our ARR mix and growing over 50%. Lastly, we continue to see positive dollar net retention trends. We saw strong upsells as well as record low churns. upsells were driven by increased user count as well as contact center adoption and our healthy customer base along with strong multi-mode usage drove record low churn. These underlying drivers have resulted in strong growth not just for the top line but also in our average revenue per account which is a key forward indicator for our growth and sales efficiency. Our average revenue per account has been steadily climbing with Q3 achieving a record high. To recap, partnerships are ramping, international demand is opening, up market is kicking into high gear, and net retention is at a multi-year high. With this backdrop, we are raising our 2021 outlook. We are increasing total revenue growth to 33 to 34%, up from 30 to 31%. We're increasing subscriptions revenue growth to 35%, up from 31 to 32%. We expect non-GAAP operating margin to be approximately 10.1%, up from 10 to 10.1%. And we are raising our non-GAAP EPS to $1.32, up from $1.28 to $1.30. Given the strong pipeline and higher visibility with our partnerships, We also expect Q4 direct and partner ARR growth to be at or better than our Q3 growth level. In summary, it was a stellar Q3, and we are on pace to close the year out with strong momentum. Before I hand the call to the operator, I want to say that it's been a privilege to be the CFO of RingCentral. RingCentral's track record of trust, innovation, and partnerships is exceptional and I'm proud to have contributed. With the company firing on all cylinders, now is the right time for me to take some time off as I consider the next chapter of my life. I want to thank the entire RingCentral family for an extraordinary run. And last but certainly not least, I'm extremely grateful to all our analysts and investors for your support and recognition. I will surely miss talking to all of you. With that, let's turn the call to the operator for Q&A.
spk02: We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then 2. And the first question comes from Valan Suri with William Blair. Please go ahead.
spk04: Thank you. Can you guys hear me okay? Absolutely, Valan. Great, great. Well, congratulations, guys. I mean, it was blockbuster earnings. The partnership number was amazing. You know, the one blemish, obviously, Mitesh, you've had a massive impact, and I know Vlad and Amantetta too, but I'll say it from our side, you've had an amazing impact on shareholders and on all of us. You've done a great job and you'll be sorely missed. But do stay in touch, my friend. I do want to talk, I just had one major question here, which is the one I think a lot of people have, which is you had obviously a really, really strong direct and partner contribution. I guess you added to that partner with Mitel. How should we, or what do you expect, how should we think about the contribution with Mitel going forward, say over some period of time, I'll let you define that, But how should we think about that contribution from Mitel? What do you expect? I love some color there. Thank you.
spk17: Sure, Bhavan. Thank you for the kind words, first off. And, of course, we'll stay in touch. In terms of the direct and partnerships, yes, we had a very strong quarter there. Look, our partner strategy is very unique. It does give us a clear advantage to capture the secular growth for a long, long period of time. And I think this will be really hard for others to replicate. As to Mitel, this partnership is differentiated in many, many regards. One key facet is that it'll be the ring central brand going forward. And so what it means is there'll be a faster time to market. So we'll begin the sales and channel enablement fairly quickly. But in terms of contributions, I think we'll start to meaningfully layer on contributions in the back half of 22. following device compatibility and then we have this very unique cloud link architecture which will further unlock demand after that now if you take it a click up right for all the partnerships right uh for 2022 you'll have all the three years contributing and you'll have mitel layering on and one final thing to note on these partnerships baban is that it's the these partnerships are just not a one and done the benefit of these partnerships uh come year after year with a steady drumbeat and really extend the durability and the maturity of the financial model and really increase the terminal value of RingCentral significantly.
spk03: Gotcha. Gotcha. Super helpful.
spk04: Congrats. And, Mitesh, thanks again.
spk03: Of course.
spk02: The next question comes from Terry Tillman with Truist Securities. Please go ahead.
spk08: Hey, good afternoon, Vlad, Ana, and Mitesh, and congratulations from me as well. In the spirit of probably trying to embarrass Mitesh, I would say you've come a long way from being a fellow sell-side analyst over a decade ago when we sit at these analyst days together to the tremendous job you've done, particularly on this consistent financial execution quarter after quarter, all the metrics, the unit economics, and really trying to create a narrative that was a good aid for myself and investors. So congrats on everything and good luck going forward. Now with an actual question, it looks like when I'm looking at fourth quarter, particularly the subscription revenue, the guidance, it looks stout. It actually looks stronger than what typically you provide. And I know you try to be conservative, but maybe you could help us kind of unpack what's the confidence or what are the drivers that's driving that? I think much stronger than I anticipated subscription revenue guide for 4Q. And that's my only question. Thank you.
spk17: Thank you, Terry, yes. Thank you for the kind words as well. It has been a long journey since I used to be your back carrier, so we'll try to do that once in a while. But in terms of your actual question, there's always, there's no change to the guidance philosophy. We still guide with our usual prudence and leave a fair amount of optionality in the guidance and hope to outperform as we always do. So in terms of what's driving the confidence, that's a fair question. It's a couple of things. It's higher visibility from two or three things. So the first one is the full impact you see from Q3. It's a recurring revenue business, so the full impact shows up in the fourth quarter. That's point number one. Point number two, the pipeline. The pipe is at a record high. So that also allows us to have a very high visibility. And number three is our earnings is a week later on. So we did get to see a full month of October and the momentum thereof. So net-net, we've got multiple growth engines firing with our MVP, and UCaaS and CCaaS demand together is pulling forward. And with the increased pipe, it gives us enormous confidence for the Q4 guide. That sounds great.
spk03: I'll probably be carrying your bag, though, to get that correct there. Thank you.
spk02: The next question comes from Brian Peterson with Raymond James. Please go ahead.
spk05: I'll add to the Vaughn and Terry's comments. Mitesh, it's really been a pleasure to work with you, and you're going to be sorely missed on these calls. But you are kind of dropping the mic here with the quarter, the guide, and then the mic help partnership. But I want to start on another topic. We're just going to get this question tomorrow, and I guess it's more on 2022. I know you guys aren't officially guiding anything, but we're going to have a new CFO coming in. So is there anything that you've got to share qualitatively about expectations for 2022?
spk17: yeah no that's a fair one brian and thank you again for for the drop the mic comment i really appreciate this look we again as usual we don't guide for our 2022 until q4 which is a february call but you should be rest assured that given the momentum we have the drivers in place plus with the addition of mitel we do have a lot of things to be excited going forward uh which and for our key is our durable growth model so i think There will be no showstoppers for the years to come.
spk05: Got it. Maybe just to follow up for Adan, so obviously some big news today with Mitel. There's just a lot of potentially hardware vendors and interior vendors that you can work with. Is it starting to point with some of these potential partners where it's why they aren't going with RingCentral, and how confident are you in the cadence to continue to add new partners as you kind of continue to build up that global opportunity? Thanks, Tess.
spk09: Yeah, why don't I take that? So a couple of things. One is, you know, it's not just we've talked about the 3As, we've talked about Mitel. We also have the one partnerships you guys haven't asked about yet is the carrier providers, the service providers. So there's many different layers and types of partners, and we are confident on this journey of layering on more partners for more kinds of growth coming on. And that goes back to what Vlad said earlier, which is, The partner-first mindset, which RingCentral displays, is as critical to establishing these partnerships, you know, in addition to the innovation and the RingCentral MVP platform being the best UCAS solution in the industry. Both of them equally matter, and we're just getting started, as Vlad always says.
spk02: The next question comes from Sterling Audie with JP Morgan. Please go ahead.
spk06: Yeah, thanks. Just a quick congrats and good luck with the next step, Natasha. It will be great to work with you again in the future. In terms of the business, on the Mitel opportunity, can you help us understand what your initial thoughts are around pricing for users, given that it's this hybrid approach instead of full UCAST? and what the migration plan for those users over time will be to full cloud and how that pricing evolves.
spk03: Mithish, you want to take the pricing one?
spk17: Sure, I can take it. Look, I think the punchline here for Mitel's partnership is that we'll be converting the base to our MVP product. So the pricing will follow what we have done in the past. And on that note, our ARPU has been super stable, and our ARPI has been increasing. So I think you will see more of a continued story there.
spk10: I also want to comment on the hybrid comment you have, Sterling. Strategy is not hybrid. Strategy is full cloud, no questions asked. What CloudLink offers us is ability to transition customers, if you will, in baby steps with them using messaging NVIDIA from the cloud while still utilizing their on-prem iron for voice. But there is absolutely no doubt in anyone's mind, ours or Mitel's, that end result is going to be MVP with all of M and V and P, all of them being strictly in the cloud. So once those customers transition, we would expect same, if not better pricing. as they would be more familiar with the platform, it would be a smaller step for them to take. But even in this interim, of course, we're hoping to be able to monetize our M messaging and video technology to Mitel's 35 million users. Just want to reiterate that this has never been done before in the industry. and it's an absolute first. Obviously, the jury is out. We'll have to see how users react, but for now, it seems that it should remove a major, major obstacle, and then why not, as people consider their digital transformation.
spk06: That makes a lot of sense, and maybe just one follow-up, if I could. On Microsoft, with the announcement, and I forget the exact term. If it's Operator Connect, and they have the direct program, Where does RingCentral fit in each of those programs? And are some of the announcements that have been made over the last quarter, does that diminish your opportunity to participate and win business alongside Microsoft?
spk10: Yeah, Microsoft has many ways of addressing the core issues. The core issues is they do not have a viable cloud PBX product. So let's start with that. So they have direct routing, which is actually a tailwind for us, which allows cloud UCaaS providers like ourselves to plug into Microsoft's quarter billion strong Teams user base. But remember, those users are using Teams messaging, by and large, Teams video, not Teams telephony. So this is where we come in and our direct peers. We are doing very well there. We haven't broken out the numbers, but I can tell you that it is definitely a growth driver for us if you just look at teams and direct routing as a sub-segment. Now, as far as Operator Connect, the latest thing, this is for people like AT&T and Verizon and such to plug directly into the phone part of Microsoft PBX. And frankly, that capability was there for a long time anyway. It doesn't change the fact that Microsoft again, really does not have a competitive PBX product in the cloud. They don't have a competitive worldwide global footprint like we do. And frankly, if you were to ask me, it's just another admission of the fact that their technology is incomplete. Their MVP strategy, and by the way, they're the only ones who are other than ourselves, who are talking about the strategy, but their MVP strategy has a good M, maybe a KV, and not a KP. Obviously, coming from our side, we have a very, very strong P, as we continue demonstrating.
spk03: Got it. Thank you, guys.
spk02: Before going to our next question, we ask that in the interest of time, those asking questions moving forward, please limit themselves to only one question. The next question comes from George Sutton with Craig Hallam. Please go ahead.
spk22: Thank you, Mitesh. I remember sitting down. You told me about the Salesforce.com model experience and how this was going to look like that, and I thought you were insane, and look at you now. So congratulations. I'm a believer in video becoming the first decision that a new company is going to make versus phone. And I'm curious if you have started to do anything differently from a marketing of the video part of your capabilities as a result.
spk03: Yeah, so let me start. Go ahead.
spk09: Vlad, do you want to take it? I'll jump on. Yeah, so this is what I was going to say. So one, for us, the strategy is across message, video, and phone. And as Vlad even shared in his prepared remarks, our customer base, the number of users who are using multiple modalities is a lot. So people use messaging and phone, video and phone. So video is already an integral part of a strategy. The second thing I wanted to also share is All our new customers are defaulted on RCB at this point in time. All our strategic partners, the 3As, MitelNow, and going forward, as you look at our carrier partners, Vodafone Business, et cetera, all of them are defaulting all of their new customers on video as well. So RCB is already going along in the right path. The third thing I would offer there is even looking at our install base. Over 70% of our install base has already migrated to RCB. And by the way, when they migrate to our CV, we actually see their usage, their daily active hosts increase and do better. So we feel that video is already on the right path as part of our MVP strategy. And that's where we go back to. People want a unified communication strategy across message, video, and phone. And we feel we represent one of the best value propositions for customers in the market.
spk22: Awesome. Thank you.
spk10: I just want to add to this just a little bit is that if you look at the new Mitel announcement, it actually very much plays into the thesis that you have that many of these may be video-led sales. And I'll double-click on that in a sec, but the whole thing with CloudLink, is the point that we will now be able to lead with video and messaging while letting them move phone, telephony at a later date. So it does play . And to double click, the opportunity here, and it's a fairly immediate opportunity now, is 35 million Mitel users Of which by the way, I should add vast majority is in regions where we already operate namely America and and Western Europe Okay, so that's One key point another one though. I want to highlight is that while sales may be video led and It is also true that video is a lot less sticky than messaging or the phone. And we are seeing this firsthand now on the positive side of this equation, if you will, as we are migrating users to Green Central Video. from an OEM product and that migration is going very very well and you know basically as long as video experiences are sufficient and comparable then people are happy to switch people are not happy or able to switch their messaging or their phone which is why if you look at it all of the competitors or would be competitors are are now doubling down on phone because they also realize that the issue that they have is that Ring has a decade-strong jumpstart on technology. We are the only ones with 5.9 reliability over three years. I would urge all of you to compare that record against any and all of our competitors. between our strategic partnerships Avaya, Altos, Alcatel, Enterprise, now Mitel, and something like 50% or 60% of world's top carriers now bending behind RingCentral. It's a little bit hard for me to see how this strategy is not going to play out in a very, very positive way. There is a technological advantage, and there is, I would say, especially with this announcement, an almost insurmountable partnership advantage that we have. The remaining component of the strategy, which we'll call TIP, which stands for Trust Innovation and Partnerships, remaining part is T for Trust, we're second to none there as well. So, pretty confident.
spk02: The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.
spk19: Great, thanks. Just a question. Since the Mitel partnership allows you to kind of have more exclusive access to CloudLink, is that something where you could use that porting technology eventually with some of your other partnerships? Or do the terms kind of require it to stay on the Mitel platform only?
spk10: Thanks. Let me take that. So, short answer is absolutely yes. RingCentral now owns CloudLink outright. There will be further cooperation between the companies in feature enhancements and other platform enhancements, but it is our IP, meaningful number of dollars change hands as part of this transaction. The reason for that is CloudLink, and specifically our ability to not only apply it to Mitel's 35 million user base, but to apply it at will to other platforms.
spk03: Perfect, thank you.
spk02: The next question comes from Samad Samana with Jefferies. Please go ahead.
spk00: All right. Good evening. Thanks for taking my questions. First, Mitesh, congrats on helping a guy ring so well over the last several years. I hope you get some time off, and I wish you the best on your next even bigger challenge, which is improving your golf game. So maybe on to the question, you know, I wanted to maybe unpack the $650 million that's being invested into Mitel. How much of that is for the exclusivity in being able to transition the base versus the acquired IP? And could you have built it yourselves, and are there minimums for the deal that you get in terms of minimum seat commitments?
spk17: Sure, Samad. Yeah, I will try on the first part, which is the golf game. But in terms of the $650 million, it's a combination of, IP, exclusivity, and clouding together. It's going to be hard for us to break down each component separately. And the contract has all kinds of cool provisions, which will be hard for us to get into on this call for competitive reasons. But rest assured, I think what Vlad mentioned, there is some industry-first defining things we are doing, which has never been done before. So stay tuned.
spk03: Great. Thanks so much.
spk02: The next question comes from James Fish with Piper Sandler. Please go ahead.
spk12: Hey, guys. Thanks for sneaking me in here, and congrats, Mitesh, here on the exit here. I look forward to working with you down the road. You know, just for me, what are you guys seeing in terms of new endpoints, one between, or new users, one between those deals with the strategic partners, versus kind of non-strategic wins in terms of the big ones and the carriers, of course, and any way to think about how that mix could change longer term. And I'm going to sneak in a 1B here. Did you guys provide an update in terms of where the CCAS penetration is and what that mix is between reselling your third-party partners versus selling some of your own stuff? Thanks, guys.
spk03: Go ahead.
spk10: Jim, maybe we can rephrase the question. I'm not sure. You know, wins are wins. And, you know, we're not beggars, but we're not choosing. I mean, we like every win regardless of where it comes from. So could you maybe just ask the question one more time, please?
spk12: Yeah, I'm trying to understand what percentage of the new users you guys are getting. are coming from the strategic partnerships that you have versus the non-strategic partners that you have. So winning against Cisco, for example, or NEC, those kind of companies, just trying to understand how that is doing given the success you guys are talking about with partnerships, especially this quarter.
spk09: Yeah, you know, I'm going to take that. Okay. Let me take a first shot at it and then yeah. So this is how I would phrase it, Jim, Actually, all of these partners are actually layering on growth put expectations in the right way. So, you know, when I look at Avaya, I mean, it was a really good quarter, record million-dollar-plus CCV wins, good growth in seats, new accounts, transaction volume, strengthen up markets, strengthen international. The same way, you know, when I look at Atos, it's sort of the same thing, strong pipe, sequential progress on large deals, important driver of international growth. When I look at the carriers, it's sort of more of the same, which is, you know, the quarters are getting better sequentially and year on year. We're building momentum on verticals, you know, and a lot of the key verticals are popping up really nicely, education, healthcare, retail. And we are also starting to see good upmarket penetration across the board with the carriers. And then finally, we don't talk enough about the channel. The channel has been a foundation for us, and the channel momentum continues. So it's going to be hard to say strategic versus non-strategic. all of these different varieties of partners, different avatars of partners are layering on growth in the right way, which is, you know, in a way, which is what is propelling these, the 12 point acceleration Mitesh talked about on direct plus partner is a result of, you know, all of these coming together in the right way. And oh, by the way, not to discount our direct and bar organization, our direct sales force, have been putting on quarter of quarter of really good wins across the board, across all customer segments. So this is a case of all of them starting to fire well and coming on board.
spk03: The next question comes from Matthew Nicknam with Deutsche Bank.
spk02: Please go ahead.
spk20: Hey, thanks for squeezing me in, and I'll keep it to one as well. Can you talk about the linearity during the quarter and then any color on how 4Q has started out now that we're roughly halfway in?
spk19: Thanks.
spk17: Sure, Matt. Linearity was very usual 3Q, nothing unusual to call out there. And as far as the start to 4Q, it's been a strong start for us, October. and we've seen the full results for the full month, and that also has given us more visibility for the guidance for Q4.
spk03: That's great. Congrats, Mitesh. Thank you. Thank you, my friend.
spk02: The next question comes from Will Power with Baird. Please go ahead.
spk15: Hey, thanks for taking the question. This is actually Charlie Ellick on for Will. Congrats on the results, Mitesh. It's been a pleasure working with you. I just wanted to ask one question on contact center. How do you guys feel about your internal capabilities and your strategy to partner on the higher end? How should we think about that strategy going forward? How should we think about your plans for your internal capabilities going forward?
spk09: That's a great question. So let me just set some context. One, it was a fabulous quarter for the contact center. new growth new business growth has actually been really good you know again triple digit year over year with strong enterprise momentum and we'd also shared that over 60 percent of the million dollar plus tcv deals included the contact center uh as we look at it we follow the same playbook the same strategy a very very strong partnership uh with nice and contact or nice cx1 as they call it right now for all digital first use cases we leave it engaged For everything else, we lead with nice and contact, and it's been working really well.
spk03: The mix has been sort of stable over the quarters. Great. Thanks. The next question comes from Alex Zukin with Wolf Research.
spk02: Please go ahead.
spk07: Hey, guys. Thanks for taking the question. Just a quick housekeeping one. I guess if we think, Mitesh, around the Unit economics of the latest partnership with Mitel from an ROI or cost of customer acquisition basis, how would you compare it to the others, the other deals? And how should we think about the progression? I think you mentioned that the progression of seats or the on-ramp for this one could be faster than the others. So how do we think about that? And then on the margin side, obviously some good margin progressions this year. in the model, but as we start thinking about next year, given the resumption of travel, the increased investment in sales and marketing, should we continue to assume merchant leverage, or should we kind of pause that in the model as we reopen?
spk17: Alex, thank you, and amazing job, as usual, for packing in 15 questions in one question, so I will try to address all of them, but if not, just... follow-up again so the first one is in no particular order the seats ramping faster is a is a question or is a function of RingCentral's brand being the go-forward brand so there is no it's a faster time to market because there's no time to be spent on co-branding the product and the channel enablement along with the sales enablement happens immediately so that's point number one point number two is On unit economics, the way to think about these economics and these partnerships is that because there's enormous leverage for these partnerships on the sales and marketing side for us, the economics work out such that these partnerships, especially this Mitel one, along with the other ones, are massively accretive to the long-term model or margin profile of RingCentral. That's number two. Number three, on the leverage for next year, if you look at the unit economics again, there is enormous leverage in the business model. If you look at our recurring margin, which is our revenue less cost of goods sold and some of the recurring costs, it's north of 50%. So what we are doing though is plowing those margin dollars into fueling further growth because this opportunity of 400 million seats is too big to pass up on. So what you will see next year is a continuation of more of the same enormous leverage, but redeploying the money to fuel more growth and elongate the business model and terminal value of the company.
spk07: As good of a job as I do of asking multi-part questions, I think you do an even better job answering them. So congratulations.
spk03: Oh, my God. Thanks, bud. Thanks, man.
spk02: The next question comes from C.T. Panagrahi with Mizuho. Please go ahead.
spk18: Hey, guys. Congratulations. And Mitesh, what an impressive journey from $50 million to $1.6 billion. Congratulations. So I wanted to ask you on the direct and partner growth. That's good to see that growth accelerating even this quarter and next quarter as well. So help us understand, like, where are you at this point with Avaya Partners? Any sense of timing as to how the growth from Avaya and other major partners that we have is going to stagger next year?
spk17: Sure, sure, Siti. Thank you for the amazingly kind words here. The way to think about the partnerships is, and I'll parse it out with each and every partnership of ours, and then I'll amalgamate them. So Avaya is the furthest ramped, and which is what you saw in Q3 and you'll see in Q4. Atos is next in line, where we are seeing contributions coming on. The next one is Alcatel Lucent, where we hope to have contributions starting 2022, which is what we flagged earlier. And then now the latest installment of Mitel would be in earnest back half of 22. And so that's going to be the layering effect. The punchline here, CT, as you roll forward to beyond 22, this is what the beauty of these partnerships are, because there will be a steady drumbeat of seats coming in for multiple years to come.
spk18: That's great. Thank you. And we probably will see this acceleration growing.
spk02: The next question comes from Ryan McWilliams with Barclays. Please go ahead.
spk13: Thanks. So we had the Avaya Cisco channel, then the reseller channel. And after today, I think it's fair to say we now have the RingCentral channel. But kind of wanted to go a different direction and talk about your 1,400-seat win with the on-prem hospital with Avaya. You know, that's pretty interesting given how complex, you know, some of those deployments are for hospitals. So are you starting to see larger customers in sectors like the public sector or healthcare that have previously been slower to adopt cloud solutions starting to accelerate those cloud voice deployments? Thanks.
spk09: Absolutely, Ryan. We are actually, you know, that's why I said, you know, we are starting to see vertical strength coming up from these strategic partnerships as well. You know, in Hawaii, I just called out how education and healthcare is actually making a big difference. So that's where we saw early traction for bigger and larger wins. converting from on-prem Avaya to ACO. And we're seeing similar strength, not just in Avaya, but also in Autos, also in some of the carrier partners. We're seeing some of these key verticals pop up in a significant way, which is leading to some of the wins. Mitesh also called out one specific thing. A lot of these partners are coming on internationally. I mean, this was a record large deal, million-dollar-plus TCV win for us internationally coming on as well. Almost a third of a large million-dollar-plus win came from the international segment. And that is where specific verticals are popping out in a key way, education, healthcare, retail, financial services.
spk03: Appreciate the color. Thanks, guys.
spk02: The next question comes from Steve Enders with KeyBank. Please go ahead.
spk21: Hi, this is George on for Steve. Thanks for taking the question. I want to echo everyone else's congratulations. I wanted to follow up on a previous question about applying CloudLink to other partners outside of Mitel. Can you just explain the strategy a little more? Is the idea to sell this as a product into those bases or is it to utilize it as a tool to help accelerate their adoption curves. Just any color would be helpful. Thank you.
spk10: Yeah, Vlad here. No, great question. No, it's the latter. CloudLink is middleware, and value of CloudLink is to allow for those transitional deployments. So monetization will be from MVP, message, video, and phone. and that monetization to ring, Mitel will continue monetizing their on-prem piece for as long as that exists. And again, the differentiating part with this approach is that we will now be in position to sooner than later monetize the M and V parts of MVP you know, without, you know, having to wait for the heavier lift P, you know, for foam, you know, that will come in later.
spk21: Perfect. Thanks so much and congrats again.
spk02: Thank you. The next question comes from Michael Turin with Wells Fargo Securities.
spk14: Please go ahead. Hey there. Congrats to the team on the results and congrats on stepping down on a very high note here. I just wanted to sneak one in on international. I know Anand referenced it a little bit just a moment ago, but the degree to which you're expanding there stands out. Now partnerships in Mexico, licensing in India. So global footprint continues to expand. Can you just put some context around where you are from an international standpoint and how some of those investments help differentiate, whether it's region-specific or just from a multinational perspective? Thank you.
spk09: It is many layers there, Michael. You know, you actually called out some of them as well, right? Which is a lot of the partnerships are helping us extend our reach internationally. This is where, you know, Autos has been a huge powerhouse in helping us establish many of international wins and many international large deal wins actually there. Now, there's a lot of things which have been done, which is adding to it. You called out the unified license in India, which is the first ever granted to a UCAS provider. And so we are pretty proud of that. On top of that, we also announced our security posture, and security matters a lot. And this is where, when Vlad talks about trust, is a huge commitment. It is not just the five nines, the journey of five nines SLA and reliability. We've been on more than three years. That makes a difference. The end-to-end encryption we recently launched for RingCentral Video, that makes a difference. Our security posture, which we announced for data privacy, data residency, that makes a difference. So all of those things are coming together to create, you know, a significant momentum in upmarket wins, significant momentum in large steel wins. And our partnerships from Avaya to Autos to the carrier partners from British Telecom is actually, you know, starting to create more layers of international growth. And we have not even talked yet. about Vodafone business, which is coming on soon, Deutsche Telekom, which is coming on soon. So we are pretty bullish. And Mitel has a significant international presence as well. So we are very bullish on where international is going in terms of contribution to the overall business.
spk03: Great. Thank you.
spk02: The next question comes from Tim Horan with Oppenheimer. Please go ahead.
spk01: Thanks, guys. Great quarter. Vlad, can you just talk about the conversations with enterprise customers now that we're kind of pulling out of COVID. Do they realize hybrid work is going to be the new normal and maybe they should accelerate the timing of cloud adoption? And do you think we can kind of see maybe two or three, next two or three years, more like five, six years type of normal adoption given hybrid work and the new normal?
spk10: Yeah. Yeah. Hey, Brian. Hey, just to remind everyone, Ring, you know, was not, is not a COVID story, right? And our numbers speak for themselves. We are, you know, we performed at, you know, 30 plus year over year growth before COVID, into COVID, and now, you know, hopefully COVID is subsiding. As you can see, our growth is only accelerating. Again, just looking at the numbers and sticking with what we already disclosed, our enterprise business is our fastest growing segment. It is growing at over 60% year over year, and it is now a very significant business in its own right with over $650 million of ARR. So, again, you know, you've heard me before, numbers don't lie, you know. Now, is this attributed to companies being, you know, more accustomed to hybrid? You know, a little bit hard to say. We are seeing consistent growth in all segments led by enterprise, no equation in that. And also just a reminder, and I said this a couple of things ago, I really want to double-click because the trend is only strengthening. Mobility, mobile phones, it's not a foe, it's a friend. We terminate and connect lots and lots of calls through mobile devices as well as we do with desktop devices, okay? So again, when COVID just hit, I didn't talk about work from home. Many people have. I did not. We did not. We talked about work from anywhere. And work from anywhere hasn't changed, and we don't think it will change. Now, what we are seeing, though, is now renewed interest in Cloud Contact Center in CCaaS, and you're seeing it across the board, and pure CCaaS players are obviously printing pretty good numbers. So that's great, we're absolutely benefiting from that. But again, our core business is very strong, is stronger than ever, and we'll just, again, with Mitel, You might have a relationship and cloud link. We think it will do well. Thank you.
spk03: If that's what the future has for us. This concludes our question and answer session, which also concludes today's conference call.
spk02: Thank you for attending today's presentation. You may now disconnect.
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