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spk11: Hello, and welcome to the RingCentral Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then two. Please limit yourself to one question. Please note, this event is being recorded. At this time, I would like to turn the conference over to Will Wong, VP of Investor Relations. Please go ahead.
spk14: Thank you. Good afternoon and welcome to RingCentral's second quarter 2022 earnings conference call. I'm Will Wong, RingCentral's Vice President of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO, Mo Kadaba, President and Chief Operating Officer, and Sona Lee Parrick, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Mo, and Sona Lee, followed by Q&A. We also have a slide presentation available on our Investor Relations website that will coincide with today's call, which you can find under the Financial Results section at ir.ringcentral.com. Some of our discussions or responses to your questions will contain forward-looking statements, including our third quarter and full year 2022 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 filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. 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.
spk02: Thanks, Will. Good afternoon, everyone, and thank you for joining our second quarter earnings conference call. While we're not immune from the current macro environment, we delivered a strong Q2. Let me start by giving you five fun facts. One, we are a $2 billion ARR company. Two, Contact Center is now over a quarter billion of ARR and is a key growth driver for us. Three, we are now at more than 5 million paid seats in our base. Four, we matched our quarterly record of $1 million plus TCV deals, bringing the total to almost 500. And five, we delivered a record operating margin in the quarter of 11.3%, up 110 basis points year over year. These results demonstrate RingCentra's leadership position in UCAS, driven by our product innovations and unique go-to-market strategies. We have been able to achieve these milestones through consistent execution. Q2 was no exception. Sonali, who I'd like to welcome to her first earnings call as RingCentral's CFO, will share with you more details about our financial results shortly. Let me first give you the highlights. Subscription revenue grew 32% year-over-year. and 33% on a constant currency basis. Total revenue grew 28% year over year and 30% on a constant currency basis. Both were above the high end of our guidance, even taking into account the stronger dollar. Operating margins of 11.3% were a quarterly record and well above our guidance. with three cash flow margins expanding 220 basis points year-over-year to 6%. Following solid margin expansion in Q1, these results give us confidence in our ability to deliver sustainable growth while expanding our margins. Our success to date is grounded in four global megatrends. These are 1. The cementing of hybrid work in the post-COVID era, which in turn reinforces the need for cloud-based communications platforms. Two, the ongoing adoption of mobility by businesses worldwide, which drives the need for solutions that enable work in any mode, on any device, from anywhere. Mobility is a friend, not a foe. Three, teams in the enterprise. which creates a meaningful opportunity for well-integrated, enterprise-grade UCaaS and CCaaS solutions. We believe Teams is a growth driver for RingCentral. Four, preference from CIOs to purchase an integrated cloud-based unified communications and contact center from a single provider, consistent with historical on-prem buying behaviors. Voice remains a key mode of communication for consumer-to-business interactions across a vast array of industries. These include healthcare, professional services such as insurance and finance, logistics, government and education, to name a few. We continue to win in all these verticals. Another fun fact. We recently engaged a third party to conduct a survey of key technology purchase decision makers. 85% of respondents consider voice to be very to extremely important to customer engagement. 80% noted that voice is very to extremely important to revenue generation. We continue to win because of our core corporate values, trust, innovation, and partnerships. First, trust. For our customers, this marks the 16th consecutive quarter of Five Nines Uptime, which is a key competitive differentiator. Our customers need to know with certainty that when their customers need to reach them or when they need to communicate with any of their stakeholders, the technology will work. Time and again, customers tell us that one of their top reasons for picking Green Central is our proven reliability. And underpinning everything we do is our dedication to security and data privacy. Simply put, we treat our customers' data like our own. We also embed state-of-the-art capabilities, such as end-to-end encryption, into our portfolio. And speaking of traffic, we are proud to announce that yesterday we released our 2021 impact report, which highlights our commitment to our customers, our people, our shareholders, and the communities we operate in. Second, innovation. RingCentral is committed to leading with innovation, creating features and functionality that customers want and need. To highlight a few of our significant innovations in Q2, we launched new enhancements with our Salesforce and Hotspot integrations, making it easier for our customers to reach and engage with their prospects and customers. For large international deployments, we introduced a smart dial plan and a new bulk number management capability. These innovative features make it easier for international enterprises to connect their employees and customers across the globe. We have also enhanced RingCentral Rooms with new seamless integrations with hardware partners like Abacor, Jabra, and EPOS. This allows customers to enhance their ability to work from anywhere, whether in the office or remotely. And last but not least, partnerships. We had a good quarter with our strategic partners led by Mitel and Avaya. On that note, we would like to welcome Avaya's new CEO and reiterate our commitment to this unique partnership that paved the way for the world's largest installed on-prem customer base to move to the world's leading UCaaS solution. Our unique global partnerships have contributed to our growth as customers transition from on-prem to the cloud, and we're still relatively early in this journey. Looking ahead, we're firmly focused on durable growth, improving profitability, and stronger free cash flows. We have the industry's leading UCaaS platform, and the talented management team in place to drive our continued success as we address the large, untapped opportunity still ahead of us. With that, let me hand the call over to our President and Chief Operating Officer, Mo Katibe. Thanks, Vlad.
spk04: Q2 was a strong quarter, with strength from our direct business and our partners. We won close to 50 deals with a TCV of over $1 million. Our integrated, market-leading UCaaS and CCaaS offering also performed very well, with continued increase in the attach of CC on UC for our upmarket teams. And we were able to achieve these results while driving revenue and operating margin growth. In short, we executed well. Now, let me give you some examples of how we benefited from the four megatrends that Vlad outlined. First, hybrid work. Companies are enabling their people to work from anywhere, and RingCentral helps them be productive wherever they are. As an example, CNS Wholesale Grocers, a US industry leader in supply chain solutions and wholesale grocery supply, recently selected RingCentral to replace their legacy PBX infrastructure. Here's what CNS had to say. As we researched cloud solutions to replace our PBX infrastructure, we saw that with RingCentral, we could integrate a whole suite of communication features in one platform, connect our dozens of offices across the country for the first time ever, empower our employees to communicate from anywhere, and still save a million bucks a year. Second, mobility. One of the largest real estate brokerages in the United States needed a solution that seamlessly allowed their offices to back each other up and securely route calls to their thousands of agents, whether in the office, at home, or in the field. And beyond creating a truly mobility-centric solution, the brokerage was able to recognize meaningful ROI by selecting RingCentral with $2 million of savings over five years via transparent and predictable cost structure. As a bonus, this also freed up their IT teams to focus on other key initiatives. Third, Microsoft Teams, which continues to be a growth driver for RingCentral. Second quarter was the single largest quarter of growth yet. Now, The vast majority of Teams customers are on E1 or E3 licenses, which do not include any sort of phone or telephony service, a key part of any business identity. This creates an immediate opportunity to complete the cloud communication suite by adding a well-integrated UCAS solution like RingCentral. And as to the minority of Teams customers who have an E5 license, first, they still require an incremental calling plan to make calls outside of their company. And even more importantly, they often need a richer feature set, 5.9's reliability, an integrated contact center option, and a larger geographical footprint, all things that RingCentral can offer. In short, customers are benefiting both from a feature and cost perspective when adding RingCentral to their team's environments. For example, a global provider of professional services purchased Avaya Cloud Office this quarter. The customer used Teams for messaging and video, but required a telephony option that provided Five9's reliability and global reach. In evaluating their different options, they concluded that adding telephony to Teams was more costly and offered less reliability and functionality when compared to RingCentral. These cost savings are in addition to the ROI that the customer will realize if they reduce resources that supported several legacy systems. And last but not least, customers want an integrated UCaaS with CCaaS solution. RingCentral is currently the only company offering a fully integrated solution, combining market-leading UCaaS and CCaaS on a single bill and leveraging a highly scalable and reliable global voice network. Preferred Risk Insurance, a professional services company, highlights the benefits of our integrated UCaaS and CCaaS solution. Preferred Risk Insurance encountered significant challenges during the pandemic using legacy communications technology, which caused call quality issues and broken customer experiences. it became vital for the company to upgrade to a cloud solution that would allow their employees to call, message, and meet in one app from the home or in the office. They also required a cloud contact center that would provide innovative features. For example, with Ring's central contact center, they will now have the ability for their claims agents to take a recorded statement that can be added to the insurance claim while also ensuring that they can still leverage end-to-end automated call recordings for compliance purposes. Net, RingCentral is continuing to benefit from the four megatrends that we've outlined, and we see this in our pipeline and our partnerships. Regarding our pipeline, we saw three key trends this quarter. First, sales cycle times from opportunity to close has reverted to historical pre-COVID trends which we expected. Second, in demonstrating demand, we saw an increase in leads quarter over quarter and year over year. Third, opportunity size for small businesses remained consistent. However, we are seeing cautiousness from larger customers in their buying decisions, focusing on smaller initial deployments. What is clear is customers ranging from small business to enterprise and across all verticals continue to see the value of our offerings while also being mindful of broader near-term market forces that is influencing buying behavior. As part of our diverse vertical go-to-market approach, we are focused on how moving to UCAS from an on-premise solution generates a strong return on investment for our customers. In the current environment where many customers are looking more closely at their spend, we show value very quickly with an average customer payback of about nine months. Customers that move to RingCentral MVP on average are also able to reduce their telecom costs by 23%, their hardware costs by 20%, and their IT spend by 16%. Turning to our partnerships, we continue to see growth from our strategic partners and the GSP community. Seats from our strategic partnerships are up almost 100% year-over-year. Mitel continues to gain traction as endpoint compatibility remains on track, and we continue to onboard their channel partners. Avaya also continues to consistently add seats to our growing base with another sequential growth quarter. We continue to believe that there is a meaningful opportunity for ACO as a destination for Avias customers, which represent the world's largest installed on-premise base. Partners remain part of our differentiated go-to-market strategy and are contributing to our million-dollar-plus wins in the enterprise market. Last, international continues to be an area of opportunity. In addition to recently launching with Vodafone in Germany, We closed multiple million-dollar TCV wins outside of North America and launched services in new geographies. We continue to build up our efforts globally as we are still early in the opportunity. To summarize, we had a strong quarter. We win because of our unmatched best-in-class product, go-to-market motion, and our ability to address customer needs and pain points with clear value and ROI. Now I'll pass it over to Sonali to discuss financials and our guidance.
spk13: Thanks, Mo. It's a pleasure to be here on my first earnings call as RingCentral's CFO. I've met some of you since I joined in May and look forward to spending time with more of you in the coming weeks and months. I chose to join RingCentral because I saw a compelling opportunity to join a category leader in a high-growth space operating at scale. Importantly, RingCentral is one of the few high-growth SaaS companies with a $2 billion revenue run rate, expanding operating margins, and free cash flow. My first few weeks have reinforced my belief that RingCentral is still in the early innings of a tremendous market opportunity, and I look forward to sharing our progress with you in future quarters. As RingCentral's CFO, my top priority will be driving efficient growth. This includes expanding operating margin and free cash flow, while investing in and driving our future growth. I will be firmly focused on creating value for our key stakeholders, which include our customers, our employees, and our shareholders. With that, let me turn to our Q2 highlights. Q2 was a strong quarter. All key metrics came in above the high end of our guidance, and we delivered a record operating profit margin. Subscription revenue rose 32% year over year to $463 million, above the high end of our guidance range of 28% to 29%. Adjusted for constant currency, which represented a roughly 1.5 point impact, subscription revenue rose over 33%. As we highlighted last quarter, balancing growth and profitability is one of our core tenets. I am particularly pleased with the improvement in our non-GAAP operating margin of 11.3%, which was meaningfully above our previous outlook of 10.4%. This was up 110 basis points year over year and continued the expansion we delivered last quarter. Additionally, we ended the quarter with $306 million of cash on hand and generated non-GAAP free cash flow of $29 million. This represented a free cash flow margin of 6%, up 220 basis points versus last year. Now, let me share with you some commentary around the key drivers of our results. Firstly, growth. During the quarter, we benefited from strong upsell into our base, as customers continue to move to higher value and higher price point SKUs, as well as expand their seats with us. Additionally, Contact Center continues to be a strong growth driver for us and is outpacing our overall growth. Many CIOs want to buy a unified communications and contact center as an integrated global solution from a single provider, and we are well positioned to benefit. given our leading product and integration. Importantly, overall ARPUs remain stable quarter over quarter and year over year and are north of $30. Also, new customer acquisition ARPUs remain steady and over $30. Customers buy RingCentral because they see the value in our global integrated message, video, phone, and contact center platform. with advanced features including analytics and AI, and our consistent five-nines reliability. We save customers money and improve their productivity. Regarding new bookings, we saw a $15 million impact from the stronger dollar. Adjusted for currency, our implied new bookings would have been over $100 million and consistent with last year's sequential trend. Now, let me turn to profitability. Our solid operating margin starts with our industry-leading subscription gross margins of 82.7%. Additionally, margin improvement during the quarter was driven by realizing efficiencies such as more disciplined hiring and vendor consolidation while prioritizing investments in our core innovation and growth vectors. We will continue to take a balanced view of investments, ensuring they meet our return criteria. Additionally, we will be looking at all aspects of the business to evaluate further opportunities to drive efficiency and continued growth. Now, turning to guidance. I will provide you with an outlook that is reflective of what we see in the market today. Regarding the current macro backdrop, as Mo stated, we saw three key trends in the quarter. These were 1. sales cycles reverting to pre-COVID norms. Two, sales leads increasing quarter over quarter and year over year. And three, more cautious buying behavior from larger customers, manifesting itself in smaller initial deployments. We recognize that companies are navigating through a more challenging backdrop than what we saw even three months ago, as well as the impact of a stronger dollar. Taking this into account, for the third quarter, we expect subscriptions revenue growth of 23 to 24%. Adjusted for constant currency, we expect subscription revenue growth of 25 to 26%. Total revenue growth of 21 to 22%. Adjusted for constant currency, we expect total revenue growth of 23 to 24%. non-GAAP operating margin of 12.5%, and non-GAAP EPS of 50 to 51 cents per share. For the full year 2022, we are reiterating our top-line guidance. We continue to expect subscription revenue growth of 27 to 28%. Adjusted for constant currency, we expect subscription revenue growth of 29 to 30%. We continue to expect total revenue growth of 25 to 26%. Adjusted for constant currency, we expect total revenue growth of 26 to 28%. On profitability, we are raising our full year non-GAAP operating margin outlook to 12%, up from our prior outlook of 11.5%. This reflects 180 basis points of year-over-year improvement at the midpoint. and we are increasing our non-GAAP EPS outlook range to 191 to 195 per share, up from our prior range of 183 to 187 per share. We have guided to 180 basis points of margin expansion this year, despite the strong dollar. Looking forward, we are committed to ongoing margin expansion and are reiterating our target of achieving at least a 20% operating margin with continued growth in our free cash flow. To summarize, we have a strong quarter marked by solid execution. We are well-placed to navigate the current environment and we will continue to invest in a disciplined matter where we see the highest return and potential for growth. Finally, I'd like to thank RingCentral's team and our board for their warm welcome and support during my first few weeks here, as well as for their ongoing hard work and dedication to our shared vision. I believe we have a large opportunity in front of us and the right team to deliver sustainable, profitable growth and to create value for our stakeholders. With that, let's open the call to questions.
spk11: Thank you. We will now begin the question and answer session. Again, to ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. In the interest of time, please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Kash Rangan of Goldman Sachs. Please go ahead.
spk19: Hi, thank you very much. Nice improvement in operating metrics and good to see the team's channel be prolific for you guys. I have two questions. One, you were very upfront about the macro environment and that you saw some level of caution. How do you think about the second half of the year? What are you incorporating with respect to macro assumptions, is it smaller deal sizes for close rates, et cetera? I did ask that because I think Q4 for you, for RingCentral, is generally a nice pickup in ARR bookings. So we should still be expecting that sort of seasonality. And one personally, congratulations and welcome to being CFO of RingCentral. You talked about how you'd be looking for operating efficiencies while not compromising growth. What are the things that you've identified in the business model that should be sources of operating leverage in the future as you target the 20% goal?
spk20: Thank you so much.
spk13: Thanks, Cash, for the question and also for your very kind remarks. I'm extremely, extremely excited to be here at RingCentral and to be partnering with this great team, this amazing leadership team. So I really do appreciate those comments. Maybe what I'll do is start with your second question, just around how we manage or how we're intending to manage balancing both growth and our drive towards greater and stronger profitability. And what I would say is you can look at this quarter as a great example because we managed to deliver pretty exceptional subscription growth and total revenue growth whilst also expanding our OP margins significantly. significantly, it was a record quarter, as you know, 11.3% of OP margin. And we really managed to do this by being quite deliberate in terms of running the business efficiently. And we specifically looked at areas such as sales and marketing, and also R&D, as well as efficiencies around supplier and vendor consolidation. And taken together, we were actually able to drive that OP margin efficiency whilst also delivering great revenue growth. And if you think about where we're guiding for the full year and the fact that we raised our OP margin guidance again, so second quarter in a row, and if you think about the guide and the minimum OP margin aspiration that we put out there, what you can see is there's a lot more goodness to come there. And we will be evaluating all aspects of the business. But what I can tell you is just being a couple of weeks or my second month into the job, I see opportunities in all three of these categories. So further opportunities to drive sales and marketing efficiency, R&D efficiency, and DNA. And the other thing I would just add there is as we become a larger company, as we scale, and my opening remarks, I mentioned being part of a $2 billion revenue run rate company. we're seeing the inherent benefits of that scale come through in the operating model. And again, just expect to see more from us in that area. In terms of the macro and what we called out specifically, I think Mo in his remarks talked about a couple of trends that we saw in the quarter. One was sales cycles reverting to pre-COVID levels, and the other one was slightly more cautious buying behavior from larger customers. And that was manifesting itself in smaller initial deal deployments. And what I would say there is that our guide is reflective of what we're seeing in the market today. And that includes the current macro backdrop and those trends that we talked to in our prepared remarks. But when you think about the guide, there's obviously several puts and takes. So on the one hand, we see those trends. And then we also have the impact of the stronger dollar which will continue and is embedded into our guidance for the second half, that strengthening of the dollar. And what I would say there is we factor in about one to two points of revenue growth just from the dollar impact. And then if you balance that against some of the other trends we talked about, which was extremely strong demand from our customers and strong pipe, and Mo specifically talked about quarter-on-quarter increase and year-over-year increase, So what we feel is that demand for our product is extremely strong. And I can say as a CFO, I think it's an easy decision to switch from PBX to the cloud because it's a positive ROI decision with a very short payback. So if anything, we feel like we're more relevant than ever in this type of macro backdrop. So in terms of the guide, we really are reflecting what we see today, including today's macro. I don't know if Mo has anything to add there.
spk04: Very comprehensive answer. Will, should we move on to the next question? Next question, please, operator.
spk11: Our next question is from Terry Tillman of Truist Securities. Please go ahead.
spk03: Yeah, thank you for taking my question. It's one question but two parts. Certainly also a welcome to RingCentral. Congrats. And also, thanks for the color on the ARR, the Exit Subscription Revenue ARR. That's very helpful. The two-part question, the first part is for Moe. I'm just trying to reconcile. It sounded as though you still have pretty good productivity, though, 50 or so or near $50 million-plus TCV deals. So I'd love to just understand some more color in terms of they clearly are starting a little bit smaller. Is it less contact center seats, or is it maybe half the size of the deployment? And then the second part of this question, though, is for you, Sonalii, is people do look at that exit subscription revenue ARR because it has implications into the next kind of 12 or 15 months. Should we see it kind of ramp up, though, as we exit the year, even with these puts and takes because of all the growth initiatives and channel partners? Thank you.
spk04: Okay, Terry, so let me take the first half of that question. And I think the punchline is, as I articulated, leads were up in the quarter, both quarter over quarter and year over year. And as we discussed, what we are seeing is a degree of consciousness in terms of our larger customers generally going with smaller initial deployments. You made a comment around contact center. I'll tell you that our attach rate of contact centers continuing to go up. So that certainly is not a factor in play. It's really just about I think the buyers are looking at any potential impact on their own business, what's happening with their own budgets, testing the technology, if you will, deploying in smaller ways, seeing the value creation that we spend a lot of time talking about with our various customer examples, and then bringing it to life. Okay, and Sonali, you want to take the second half?
spk13: Sure, so firstly, Terry, thanks for your kind wishes as well. So with respect to ARR, as you know, we don't specifically guide to ARR. I am really proud of what we achieved in the quarter, 31% growth in the second quarter. We did have, obviously, an impact from FX, and that obviously is a negative impact for this quarter. But we will continue to add healthy bookings and feel really confident in the way that we guided for both Q3 and the full year. So hopefully that answers your question.
spk14: Operator, next question.
spk11: Our next question comes from George Sutton of Craig Hallam. Please go ahead.
spk06: Thank you, Sonali. My great wishes as well. Congratulations. So I'm curious, as a user of stock compensation with the stock decline, how are you using it perhaps differently today relative to retention and or new hires?
spk04: Hey, George. I hope you're doing well. This is Mo. Look, we've guided that we expect to bring stock-based comp down year over year this year by a couple of hundred basis points. We're well on our path to achieving that, potentially even exceeding it by the end of the year. And what we're finding is, frankly, that, you know, our team and our talent is is embracing the strategy. They're fully engaged on being part of this team. We're utilizing SBC where it's required. Obviously, we think about our employee base, superstar talent, key contributors, et cetera. And as we bring that together, we're finding that we're able to find that balance of compensating appropriately, healthily, while at the same time ensuring that we're bringing down the comp as a percentage of revenue year over year. And frankly, I expect that we're going to continue to drive discipline in this space and improve over time.
spk11: Our next question is from Meta Marshall from Morgan Stanley. Please go ahead.
spk17: Great. Thanks so much and congrats on the quarter. Maybe Vlad or Mo, just as you gave the disclosure on how big the contact center business had become, kind of being over 10% of ARR, does that change how you guys think about partnering versus developing organically or just other feature sets that you would think on adding in addition to kind of contact center to expand the ARR of your customers or the ARPU of your customers? Thanks.
spk02: Yeah, hi, Amanda. Yeah, Vlad here. Look, contact center is very important, obviously. And as we stated and reiterated, we are still in the unique position of being able to provide market-leading, MQ-leading UCaaS and CCaaS on the same paper and on the same network. So that is just a unique differentiator not existing elsewhere. Now, clearly, customers are liking it. Historically, people have been buying from, in the on-prem days, people have been buying UC and CC largely from the same vendor led by Avaya and Cisco, historically. And we are now seeing similar behaviors repeat themselves in in the software in the cloud software the service world okay now so top line growth is you know is wonderful now clearly it'd be nice to be able to own the whole stack but it's a very very heavy lift So the strategy that we have seems to be working and we think will continue working, whereby for those customers who require best of the best in UCAS and CCAS, you know, our approach is unique and industry-leading. For those customers with lesser requirements and in particular smaller contact centers, We do, as a matter of fact, have our own product called RingCentral Engage. We have something called RingCentral Engage Digital, which has every channel but voice. And we also have something called RingCentral Engage Omni, which is a full-up integrated solution. It does not have every bell and whistle that, you know, for example, InCounter has, as well as, you know, other industry leaders. But it is an up-and-coming product, and we expect that you'll be hearing more about it.
spk11: Our next question is from Samad Samana of Jefferies. Please go ahead.
spk00: Hi, good afternoon. Just a couple questions. I guess first, I wanted to ask on the expense side, obviously, it's been great to see margins really inflect here. Can you remind us, Sonali, maybe how much of the OPEX is in USD versus in other currencies?
spk13: Hi, Samad. It's Sonali here. I'll take that question. OPEX is obviously a bit of a natural hedge to our revenues, but it's a much smaller proportion of overall, and it would mostly be Euro-based. So it's about 5% that's outside of the U.S. in the OPEX number.
spk11: The next question is from Peter Levine of Evercore. Please go ahead.
spk10: Thanks for taking my questions, and certainly welcome to the team. As we continue to hear more buyers wanting to bundle collaboration video and chat with voice in a bigger way, maybe, Vlad, in your view, how would you debunk those saying that video collaboration suites kind of take priority over voice, and then maybe second, what are you doing today to elevate the RCD brand or the investments on the collaboration side to kind of better compete against some of the larger players in this space?
spk02: Yeah. They're both important. B2B, especially within an org, yes, many interactions, not all, but many interactions are now over video or over internal conferencing. Microsoft Teams is pretty good at that. C2B, consumer interactions, consumer to business, are still largely over voice. And there doesn't seem to be any slowing down of that trend. People tend to call businesses, they tend to call the providers by voice from phones and mostly cell phones. So I think as we mentioned, we ran a survey And vast majority of people, these are our business customers and as well as other businesses who are not our customers, are saying that they believe voice will be important to extremely important both for customer engagement as well as for margin expansion and their revenue. So this is, voice is here to stay. To stay the audience, this call we're having now is via voice, okay? So that's how we will debunk it. It continues to be a tremendous market. As I stated in prepared remarks, and this is not the first time, probably not the last time I'll say that, mobility, wireless, 5G, they're all tailwinds for us. They're friends and not foes. And we continue redoubling our efforts in maintaining our leadership in this very, very core means by which people communicate. People communicate in words, not just by signs.
spk11: The next question is from Ryan McWilliams of Barclays. Please go ahead.
spk16: Thanks for taking the question. Just on the strategic partnerships in which RingCentral has made a significant investment, should those strategic partners enter financial difficulties or were acquired, would you anticipate any changes to those relationships?
spk02: I'll take that, Vlad, here. Look, we have an absolutely unique GTM approach and a partner network. There is simply not another player of, I think, any size there that can both disclose relationships with a number of leading GSPs as well as majority or people responsible for majority of on-prem PBXs, okay? Now, these are turbulent times. And obviously, some people are experiencing difficulties. And I assume the question behind your question is, what about Avaya? So let me just address that. Avaya has been a contributor. They have been a partner and a strong partner. They are also representative of the world's largest installed on-prem base. Which means what? It means that we always want more. We wanted more, we want more, and we'll continue wanting more. But they are, again, somebody that's been contributing to our success. We expect them to continue doing that. We expect that they understand that RingCentral continues to be both a growth driver for them well as a profit margin driver for them. They have a new CEO that they've announced a few days ago. It's a person we know extremely well. I have a good personal relationship with Alan and we think that this frankly could be reinvigorating the relationship with very positive outcomes for both companies and very importantly for the customers because remember their customers are still need to go to get to the cloud, RingCentral and Avaya Cloud Office by RingCentral still continues to be the only true UCaaS multi-tenant global high availability solution that is able to accept incoming Avaya's on-prem customers by leveraging, with leveraging their multi-year investments into endpoints and other points of integration. We're simply in a unique position to do that, and we expect that new management will appreciate that fact and will act accordingly.
spk11: The next question comes from Will Power from Baird. Please go ahead.
spk08: Okay, great. Yeah, thanks for taking the question. Just a question on enterprise ARR. We've seen, I guess, a deceleration a couple of quarters in a row. And it sounds like, you know, FX is certainly a piece of that. But I guess I'm wondering how much of the slower growth there is macro? How much have you already seen on the macro side versus any other factors versus how much more of the macro that you referenced in terms of smaller deal sizes or slower deployments? among your bigger customers are still on the come? I guess I'm trying to figure out how much that macro is already impacting that ARR versus maybe expectations for Q3 and Q4.
spk04: Thanks. I'll take that one. I think the net here is two key factors. The first one is FX was a headwind. Sonali talked about that one. And then the other one is what I brought up, which was called the three key trends that we saw in the quarter. Sales cycle times were hurting the pre-COVID norms. Leads were up, both quarter over quarter, year over year. And then the third one, while opportunity size for SMB remained very consistent, we did see some degree of cautiousness from larger customers in their buying decisions. At the end of the day, I put all those things together. The lead growth continues to demonstrate to me the opportunity ahead is real, that we can create value for our customers, frankly and especially so larger ones that have legacy telecom, hardware, IT support costs, where the value creation that we can bring for them is actually a help when you're in these sorts of times.
spk11: The next question comes from Matt Nicknam of Deutsche Bank. Please go ahead.
spk18: Hey, guys. Thank you for taking the question. Just a quick, simple one. Just on churn, any changes you're seeing and how is this trending across SMB mid-market and enterprise? Thanks.
spk04: I'll take that one. We saw sequential improvement in churn quarter over quarter and year over year. And that was generally true across all of our key segments.
spk11: The next question is from Michael Turin of Wells Fargo. Please go ahead.
spk12: Hey, guys. This is Austin Williams for Michael Turin. I just wanted to ask about premium SKU adoption as you push further up market, and if that's potentially offsetting any volume-related discounts at those larger customers. And just as a follow-up to that, are pricing dynamics in UCAS more broadly? Have you seen any change competitively that might be impacting the lower price SKUs? Thank you.
spk04: This is Mo. I'll jump on that one. So, you know, just to reiterate specifically, You know, our overall ARPUs were resilient. They were stable quarter over quarter, year over year. They remain north of 30. New customer acquisition ARPU, which really goes to the second part of your question, also remain steady and over 30. To your point, we're a multi-product company. As we think about ARPUs, we're looking across both our SKU base as well as the products that we're offering. And as we go further and further up market, we do see our customers buying more premium SKUs. As I mentioned a little bit ago, we're seeing continued increase in the attach rate of our contact center, and all of those become factors in the dynamic that drives these strong and healthy ARPUs. Look, I think the heart of this is we're creating value by bringing together messaging, video, and phone. as well as the ability to integrate a market-leading CCAP solution, and this is a competitive advantage that we expect to retain.
spk11: The next question comes from Taylor McGinnis from UBS. Please go ahead.
spk15: Yeah, hi. Thanks so much for taking my question. I know that FX is a little bit at play here, so I know it's tough to parse out, but if you look at the difference between last quarter, I guess subscription revenue and 2Q, it seems that some of the net new business would have been light in the quarter. So can you comment on linearity or what you might have seen there? And then I guess as we look ahead into the guide, just to be clear, are you assuming a similar
spk13: environment that you're seeing today in the guide or are you assuming you know that things deteriorate and parts are get worse sure Taylor thanks thanks for the question so firstly on FX you're absolutely right FX was a factor in q1 as well as in q2 and what I would say is that the impact to bookings in q2 was more exaggerated just given the dislocation and the dollar And in terms of what the guide is currently contemplating, what I said in my prepared remarks is that it's reflective of what we're seeing in the market today, including the trends that we've called out. And also embedded within that, the guidance includes an additional one to two points of headwind on growth from a stronger dollar, and that's for the full year 2022. So just to recap, Q1 had an impact. The Q2 impact was stronger. And the full year, we're calling out an impact of between one and two points. And the other thing I would just say is in spite of that impact from the dollar in Q2, we still had over $100 million booking quarter if you adjust for currency.
spk11: The next question is from Matt Van Vliet of BTIG. Please go ahead.
spk07: Yeah, hi. Thanks for taking the question. I guess as you look at the expansion of the Vodafone Germany deal that you announced recently, in light of all of the strategic partnerships, do you feel like you're getting to market a little faster? Is the initial reception faster? stronger? How are you feeling as you continue to expand sort of the breadth of those relationships and even the depth within each of those partnerships and how that's encouraging you to go out and seek other partnerships going forward? Thanks.
spk04: Thanks, Matt. So, you know, as you think about our global service provider community, we're continuing to see consistent revenue and seed growth And I think the heart of your question and the way I'd answer it is, you know, each of these relationships is allowing us to unlock new sales addressable markets, and frankly, you know, unlocking new markets for the foreseeable future. I expect that the new revenue-producing GSPs will continue to grow both this year as well as in 2023, and many of them internationally.
spk11: The next question is from Michael Funk of Bank of America. Please go ahead.
spk09: Yeah, thank you for the questions. One from Mo, if I could. Mo, just given your, you know, unique experience coming from AT&T and your first point about the point success for, you know, for RingCentral, you know, part of that being the transition from PBX, just wondering if you had a comment on, you know, Business revenue this quarter, I think part of that probably is that transition that we're seeing from legacy to next generation technology. So, you know, from your perspective and your history, do you think we're seeing acceleration in that transition? Is that what we're seeing in the T and the Verizon results? Obviously a lot in there, but love to hear you unpack that a bit.
spk04: Well, I appreciate the question. I certainly can't comment on any other company's results and subtending drivers, if you will. What I will tell you is that I do fundamentally believe, and it's a core part of why I came to RingCentral, that UCAS and the transition of legacy UC on-prem seats as well as legacy CC seats to use CCAS is something that is going to last for many years to come. You know, businesses, are not all ready to move to the cloud in any one given year. Frankly, as you look at the current macro environment, I think that that's going to be a factor that plays in. We've called it out several times throughout this conversation. But what I am comfortable and confident in is that the TAM is extremely large and that you're going to see consistent growth for many, many years to come.
spk11: The next question is from Matt Stottler of William Blair. Please go ahead.
spk05: Hey, team. Thank you for taking the question. Maybe just one to dig in on Microsoft Teams specifically. Obviously, you guys are still seeing some notable success in the market alongside Teams. Any additional color you can provide, whether it's in terms of the portion of the installed base that either connects to Teams or sits with Teams, any kind of updated color on how to think about ARPU in Teams environments here? And then any thoughts on additional opportunities for collaboration with Microsoft as you think about go-to-market and further integration going forward? Thank you.
spk04: Very good. So let me, I'll address that slightly out of order. On the ARPU side, I'll tell you that our team's ARPU is consistent with our overall ARPU and quite strong. Our team's customers tend to skew up market and be larger, and thus they fall into the category of more premium skews and more likely to attach contact center. By the way, it's one of the key reasons, along with Five Nines reliability, feature functionality, geographic reach that we're winning with that base. And then I just reiterate a couple of points, which is we saw meaningful growth year over year. Second quarter was the single largest individual quarter of growth that we've seen with our MS Teams practice. And frankly, it's exciting for us. As we see them growing in the market, we're seeing success for ourselves as well. And then, you know, I can't comment on any potential future opportunities and how we're thinking about that. I will tell you we're going to continue to execute on our own strategy, and it is one of the four megatrends and growth drivers for the company. Great. Thank you.
spk11: This concludes our question and answer session, as well as the conference. Thank you for attending today's presentation. You may now disconnect.
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