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spk19: Hello and welcome to RingCentral's first quarter 2023 earnings conference call. Let me now please turn the call over to Will Wong, Vice President of Investor Relations.
spk00: Thank you. Good afternoon and welcome to RingCentral's first quarter 2023 earnings conference call. Joining me today are Vlad Shminis, Founder, Chairman, and CEO, Mo Kadiba, President and Chief Operating Officer, and Sonali Parekh, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Mo, and Sonali, 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 discussion and responses to your questions will contain forward-looking statements regarding the company's business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control and are not guaranteed a future performance. Actual results may differ materially from our forward-looking statements, and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings to the Securities and Exchange Commission, as well as today's earnings release. 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. 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: Good afternoon, and thank you for joining our first quarter earnings conference call. We had a solid start of the year. Q1 results demonstrate that our strategy of driving healthy, profitable growth is paying off. Total revenue grew 14% to $534 million, above the high end of our guidance range. And ARR grew 14% to $2.2 billion. Operating margin rose almost 700 basis points year over year to 17.2%. This was also above our guidance and was once again a quarterly record. Our higher margin was driven by continued cost discipline, improved operational efficiencies, and the benefits of the actions we took last year. Those actions position us to emerge stronger and more focused when the macro environment improves. While the macro remains uncertain, we continue to be laser-focused on what we can control. This includes driving continued innovation and maintaining our disciplined approach towards increasing profitability and free cash flow. Finally, we'll provide more color on our profitability shortly. You've heard me talk about trust, innovation, and partnerships being the cornerstone of our success. As to trust, we achieved 99.999% availability for the 19th straight quarter. With respect to partnerships, more will provide more color on our progress with the channel, strategic partners, and global service providers. I will now highlight some of our key innovation accomplishments this quarter. We believe these innovations over time will increase our customer value proposition and create additional expansion opportunities within our large customer base. These include RingCentral for Teams 2.0, our next generation Microsoft Teams embedded app. RingSense, our new AI platform and its first commercial application, RingSense for Sales. RingCentral for frontline workers, which combines new push-to-talk functionality with RingCentral video and messaging. And in partnership with Vodafone Business, we have released RingCentral Overlay, which enables our messaging and video collaboration capabilities on top of legacy voice services. Let me now provide more details. First, we recently announced RingCentral for Teams 2.0. This solution brings RingCentral's world-class cloud PBX capabilities into Microsoft Teams with a fully native experience without requiring a second application. This means that end customers can now enjoy RingCentral's renowned 5.9 reliability, global availability, advanced analytics, industry-leading features, and third-party integration capabilities entirely within Teams single pane of glass. Second, ring sense. In the past, I've talked about four megatrends driving our business. These are shift to hybrid work, ongoing adoption of mobility by businesses, increasing reliance on distributed workforces, and the desire for an integrated cloud-based UC and CC solution from a single provider. A fifth megatrend has now emerged that is truly revolutionary, and that is AI. With RingSense, we now have the ability to inject AI capabilities across the entire RingCentral portfolio. As one of the world's largest UCaaS providers, we are in a unique position to offer our customers powerful insights into their conversations. With RingSense for Sales, our first offering in this portfolio we'll be able to offer sales teams features such as engagement scoring, keyword analysis, and AI-generated recommendations. We're currently transitioning our own sales team from a third-party conversational intelligence solution to Ring Sense for Sales, as well as testing it with a number of customers in closed beta. Third is RingCentral for frontline workers. This powerful solution combines new push-to-talk capabilities with RingCentral video and messaging. Gartner estimates there are 2.7 billion frontline workers, more than two times the number of desk-based workers. With our solution, frontline workers across all industries can use any smart mobile device to seamlessly and efficiently connect with their front and back office teams. It is available in beta today as either a standalone solution or as an add-on to RingCentral MVP. Mo will provide more details. And fourth, RingCentral Overlay, which enables RingCentral messaging and video collaboration capabilities for legacy customers. This innovation, in partnership with Vodafone Business, enables hybrid workforces and serves as a stepping stone for those customers to move to our complete UCAS communication solution in the future. In summary, it was a solid quarter across growth, profitability, and innovation. We continue to innovate, enhancing our differentiation. We're also later focused on efficiency, which we expect will generate robust free cash flow going forward. This sets us up well for the future and is why I'm so excited about the opportunity in front of us. Now, let me turn the call over to Mo to go over the quarter in more detail. Thanks, Vlad.
spk06: We had a solid quarter with healthy growth across the portfolio. An example of the win contributing to this healthy growth is a Fortune 500 company that purchased 5,000 seats of UCAS and 5,000 seats of CCAS They selected RingCentral for three main reasons. First, our ability to integrate seamlessly into Teams, providing 5.9 reliability and deep integrations in the ServiceNow, Salesforce, and other key aspects of their employees' workflows. Second, our integrated UC and CC platform. Beyond the simplicity of having a single vendor to manage, the entire organization can now use a single communications platform. This results in increased customer satisfaction and potential new revenue opportunities. For example, if no one at a local branch location picks up after a certain number of rings, the call can now be easily forwarded to its contact center. And finally, the company is projecting to save millions of dollars by standardizing on a single platform, removing maintenance costs, shadow IT, and telco fees. Reducing cost is a key value proposition for all of our customers, especially in today's environment. We continue to see good traction within our core business because of our ability to help customers save money. Forrester, a third-party research firm, recently published a new report on the total economic impact of using RingCentral MVP and Contact Center together. This report concluded the customers are seeing a 211% return on investment with an average payback of under six months. In addition, Forrester concluded that using RingCentral UCaaS and CCaaS together had three key benefits. First, call handling time was reduced by 45% versus 20% for a standalone contact center. Second, Internal contact center and UCAS IT support tickets were reduced by 30%. And third, time to close each ticket was reduced by 60%. Moving on to our Teams practice. In Q1, seats within our Teams business more than doubled year over year. With our updated RingCentral for Teams 2.0 solution, which is available in beta today and will be generally available this summer, we are able to provide an even better user experience. And that's not all. Most Teams users are on E1 or E3 licenses, including many in key customer-facing verticals, such as healthcare, retail, and professional services. Those customers chose RingCentral versus Teams Phone, given our deep integrations, reliability, and advanced feature sets, all at a very attractive price point. For example, UKG, a leading provider of HR, payroll, and workforce management solutions, is currently using RingCentral with Microsoft Teams. We integrate seamlessly within their existing workflows, enhancing both their internal employee experience and their customer communications. Now, let me give you an update on our go-to-market. First, strategic partners. Avaya recently emerged from bankruptcy a few days ago, and we expect that their contribution will ramp in the latter part of the year. Also, Mitel continues to perform in line with expectations and closed a million-dollar TCV transaction in Q1. We're also seeing good traction with many of our GSP partners. Charter, one of our newest partners, performed well. We also launched with Vodafone Business in additional European geographies. Lastly, our new partnership with AWS, while still in early days, is developing well, and we expect to be on the AWS marketplace later this year. Now, channel partners. They represent about 40% of our ARR base and continue to help us broaden our reach. The channel is an important part of our go-to-market, and we continue to ensure that incentives are aligned with the value that they bring. In fact, we recently launched our RingCentral Ignite program that enables partners to manage all go-to-market and customer lifecycle activities without RingCentral sales assistance, which in turn provides economic benefit for all parties. Moving to international. I'd like to highlight two international deals that we closed with our partners. The first is with a European athletic retailer with over 2,000 stores. They selected a RingCentral solution to help them streamline communications across their retail stores in France. They purchased thousands of MVP seats and also added our new frontline push-to-talk capabilities. This will allow store members to easily and securely communicate through voice, video, or messaging with the push of a button and all without additional hardware. The other is a regional government body in Europe that recently selected RingCentral to provide video and messaging to more than 55,000 users. This was a great win and demonstrated the power and value RingCentral video and messaging can provide a large organization on a standalone basis. Lastly, I want to discuss the current demand environments. The macro remains consistent with the trends we've been seeing over the last few quarters. Also, sales cycles remain elevated versus last year as customer buying decisions continue to receive significant internal scrutiny and additional layers of approval. We're also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts. However, win rates remain stable and lead flow remains consistently strong, demonstrating continued demand for on-prem to cloud conversion. With that, let me turn the call over to Sonali to discuss our financials.
spk18: Thanks, Mo. I'll provide highlights from the first quarter and then discuss our business outlook for the second quarter and full year. Subscriptions revenue of $508 million was up 16% year over year and above our guidance range. On a constant currency basis, subscriptions revenue rose 17% year over year. ARR rose 14% versus last year to $2.2 billion. On a constant currency basis, ARR rose 15%. We continue to expect ARR growth to outpace subscription revenue growth in 2023. This is due to our enterprise business being more back half-weighted. Moving to profitability. I'll be referring to non-GAAP results unless otherwise noted. Our subscription growth margin was solid at 81.8%. Overall ARPU was again resilient and above $30, supporting our strong growth margin. Operating margin rose 680 basis points versus last year to 17.2%, another quarterly record. The increase was driven by efficiencies generated across the business, most notably in sales and marketing, which was down 420 basis points versus last year. Q1 demonstrated good progress on our path to driving best-in-class profitability and free cash flow, commensurate with our scale. Regarding free cash flow, we generated 54 million in Q1 23. which includes roughly $7 million related to one-time restructuring items. The improvements to our cost of customer acquisition, collections activity, vendor management, and continued focus on driving efficiencies is leading to strong free cash flow conversion, and we expect continued improvement throughout the year. Our focus on growing free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and importantly, addressing our convertible debt maturities. Regarding our debt, our free cash flow provides us many options in terms of how we address our convert maturities. While our two converts both carry a 0% coupon and are not due until 2025 and 2026, still two and three years out respectively, they are a top priority for us and for me personally. Based on our 2023 outlook and assuming our current capital structure, our net leverage will be less than three times net debt to EBITDA for the trailing 12 months ending December 31, 2023, which we expect will continue to improve. Given the deleveraging profile, we believe we have a number of attractive choices to address our outstanding convertible maturities. Now, turning to guidance. While we outperformed our Q1 revenue outlook, we are still early in the year. Given the macro uncertainty, we are remaining prudent in our guidance. Taking this into account, for the second quarter of 2023, we expect subscriptions revenue growth of 10 to 11 percent, total revenue growth of 10 percent, non-GAAP operating margin of 17.5 percent, and non-GAAP EPS of 74 For the full year 2023, we now expect subscriptions revenue growth of 11% up from 10 to 11%. Total revenue growth of 10 to 11%. Non-GAAP operating margin of at least 18.5% up from our prior outlook of at least 18%. Based on the midpoint of our revenue guidance, we expect operating profit dollars to grow at least 65%, up from at least 60%. Non-GAAP EPS of $3.19 to $3.25, up from our prior outlook of $3.04 to $3.10. In summary, Q1 was a solid quarter. We exceeded guidance on both top and bottom line. We continue to see healthy growth in our business despite the current macro backdrop. We believe the market opportunity, our leading and differentiated product, and a laser focus on balancing growth with increased profitability positions us well for continued success. With that, let's open the call for questions.
spk19: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. In the interest of time today, please limit yourself to just one question only. To withdraw from the queue, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Samad Samana with Jefferies. Please go ahead.
spk12: Hi, good afternoon. Thanks for taking my questions. Good to see the stable results. Vlad, maybe for you, I just was curious, you talked about a number of new products and increased innovation. And I'm curious, how do you think about those products? Do you see them as ways to expand ARPU or drive cross-sell upsell? Or do you see those as features that add value that will make it easier to acquire customers? Just maybe how should we think about whether there's a direct monetization opportunity or is this a way to continue to attract more and more customers to the RingCenter platform?
spk02: Yeah. Hi, Samad. Great question. Look, it's a bit of both. And, you know, it depends. So, for example, when you look at RingSense, our AI, you know, our entry into the AI space, that is absolutely a growth driver is how we see it. It will be monetized separately. I also want to point out that it is not only aimed to be an add-on to our existing customers or to RingCentral customers in general, but we also designed it in a way that it could be a standalone product working with other UCAS, CCAS, and frankly, even UC and CC solutions. It is... general purpose like that. When you look at frontline workers with push-to-talk, it's a whole separate SKU in its own right, and again, can stand on its own or can be added to customers. When you look at our work on Overlay. That's actually super exciting, yeah? Because this is really the first time to where we are showing clear traction in areas outside of our core PBX in the cloud. So the whole point in Overlay is to integrate with legacy on-prem providers but augment the experience customer experience with our video and messaging and This we believe will a you know it presents a separate monetizable opportunity in its own right as well as Sets up for an easier migration path for those customers Once they want to go ahead and embrace the whole cloud Okay, am I missing something anything or good? so So again, a bit of both is a short answer. But having said that, look, anything we do, any value, oh, I'm sorry, by far not last or the least is our teams work and what we call RingCentral for Teams 2.0. And look, that's a major, major step forward. We believe that we simply at this point have the best Teams integration in the market today, in the universe. It's a completely seamless experience. What we have heard from customers loud and clear is that if they have standardized on Teams, they would much prefer to operate within the Teams single pane of glass But as we all know, Teams does not really have a, call it fully viable, UCaaS solution. We do. And this is a very close integration. So we feel, look, we had good Teams business before, but we were far with the market technology-wise. This, we believe, will really push us and position us well ahead of competition. Again, we'll absolutely open new doors for us. So it is definitely a revenue driver moving forward. But we also believe we'll provide stickiness to our existing Teams customers because it's just a much better experience.
spk19: The next question comes from Sterling Audie. It's Moffat. Please go ahead.
spk11: Yeah, thanks. Hi, guys. I just wondered if you could go maybe one layer deeper in terms of your discussion around how you're going to handle the convertible debt. Maybe you don't want to get into too much specifics, but anything that you can give around timing and how proactive you want to be with managing it, as well as just what are some of the options that seem to be the most obvious for managing through. Thank you.
spk17: Thanks, Darlene. Hey, it's Sonali here. And thanks for the question. As I said in my prepared remarks, this is a very specific focus for us as a management team and for me personally. So a couple of points I would make without giving too much away. One is that we expect to generate growing free cash flow over the next several years. And you would have seen in today's print along with expanding operating margin by nearly 700 basis points year over year, we also delivered a quarterly record on free cash flow. So free cash flow was $61 million in the quarter, and that was including about $7 million of restructuring charges. And we're clearly not done yet when it comes to free cash flow. Within that, we have several options to address the convert. So one is using the cash that we're generating organically, again, which you will see improve throughout the year. Secondly, you may remember last quarter we announced a $400 million term loan A. That's a delayed draw facility, which we have available to us through November of 2023. And we'll be opportunistic in terms of when and if we decide to draw on that, depending on market conditions. But with the financial profile we're driving, and if you think about how rating agencies, for example, look at enterprises such as ourselves, and you think about our EBITDA profile, we will have other financing options available to us. So we'll have access to more conventional debt markets, which we can tap if we so desire. Today, the coupon on the convertible debt is 0%. That's a CFO's dream. So we will balance addressing the converts with other capital allocation priorities, but we will not allow the converts to go current.
spk19: The next question is from CT Panagrahi with Mizuho. Please go ahead.
spk01: Thanks for taking my question. And definitely, I just want to focus on profitability cash flow. It's good to see that progress even on the margin expansion side, Sonali. So understand that you're benefiting from some of the cost cutting and the headcount reduction you did announce earlier, but could you talk about some of other drivers and progress there and driving margin expansion and also further cash flow conversion? How sustainable is that? How should we think about for next few quarters or years?
spk17: Sure, CeeDee. And, you know, I'm just going to hit the second part of your question right off the bat. It is very sustainable. And again, I'm going to repeat, you know, there's more to come. We're not done yet. You saw the 700 basis point improvement year over year this quarter. But you also know that we raised our OP margin guidance for the full year. We're now targeting at least 18.5% operating margins. and still very much exiting at least 20% in Q4. So not only is it sustainable, it's going to get better from here. Yes, we did take some actions at the end of last year, difficult actions that you're seeing flow through the numbers in the current quarter. I think the profit potential of our business model at scale is really starting to shine through. And we are continuing to focus on the productivity of our workforce and optimizing and driving down the cost of customer acquisition. This is something you've heard Mo and I talk about in the past, and that's an area that we are still really investing in. Another personal example I'll give you just from the finance side around efficiency actions is in the procurement project that we're running. We had many, many manual processes from procurement to payment, as you might understand, for a company that scaled and grew as quickly as we did. And at the moment, within my finance team, we're implementing a software that will automate a lot of these processes. And that procurement initiative alone will be saving high single-digit millions, just that one initiative within finance. You know, there's also the operating leverage inherent in the business. We're focusing on higher ROI programs. We're really prioritizing how and when we're investing our dollars. We're actively managing the workforce. So that includes opening up hubs in Dallas and Charlotte, which are lower-cost geos, versus making incremental hires in Belmont. For example, in my team, I'm not making incremental hires on the finance side. In Belmont, any of those new hires would be in lower-cost geos. And then Mo will probably talk a little bit about what we're doing on the channel side, but we are very much looking at how we pay our partners and how we work with those partners, and that will drive further efficiencies and incremental savings as partners really take on a larger role in the overall soup-to-nuts sale process. And then finally, the vendor management consolidation, where we're reviewing every contract, rationalizing licenses, bidding out our vendor contracts, everything to really get to best-in-class, best practice. And one last thing I'll share, just because you were pushing on the sustainability of this segment, profitability and I do want to also make a strong point on free cash flow. We shared last quarter that we would double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by 2024, by fiscal year end 2024. I'm now confident we can achieve this level of free cash flow generation much earlier than end of fiscal year 2024. And this level of free cash flow generation gives us a lot of flexibility around capital allocation and importantly addressing our convertible debt in a cost-efficient matter.
spk19: The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.
spk16: Great, thanks. I just wanted to see if you could kind of break down, you know, with some of the upside that you saw to the quarter that lower churn is that you know better pricing on renewals is that just slightly better that adds uh it appeared kind of the mid-market was uh the greatest source of kind of uh incremental ar growth so just trying to see is that you know churn came in a little bit less than expected just any details on kind of uh that context would be helpful thanks thanks mida um yeah so i i think i'll start off just by addressing net retention
spk17: which again is a big focus for this management team. So we produced net retention, we came in at above 100%, and within that, churn remained stable on a percentage basis, so annualized churn on a percentage basis. What I will call out is stable churn on a larger base does actually mean higher dollar churn, but overall churn stable and within plan. Again, we're actively focused on it. We've invested in CSM, so customer success and analytics in this area, as this is a big renewal year as COVID lapsed. What I would say is that we saw some pressure in upsell due to the macro, we believe, and that was mostly in enterprise. So you're absolutely right to call out that SMB was a bright spot. So we saw no material change to the dynamics in that business. And, you know, some customers within enterprise are starting to rationalize seats, given the headcount actions that they're taking internally. But we are very much focused on maintaining the logos and, again, just investing actively in that area. Mo may want to add a bit in terms of the strength we're seeing on SMB.
spk06: Sonali, I think you nailed it. At the end of the day, strength in SMB, we're seeing that market stabilize. It's continuing to do well for us. Acquisition broadly across the board was strong. And then, as Songli pointed out, stable churn, and these are the factors that we've utilized as we think about our go-forward guide as well.
spk19: The next question comes from Ryan Koontz with Needham. Please go ahead.
spk03: Thanks for the question. I wanted to ask about the team's environment. I had a chance to see your 2.0 at Enterprise Connect and was really interested in that. We've also heard anecdotally that Teams phone ads are really slowing. I'm sure that's due to the macro in general, but I wonder if you're seeing any impact on that in terms of your upside opportunity to sell the turnkey Ring UCAS solution versus opportunities to sell into Teams as your own app inside of Teams. Appreciate any color on that. Thank you.
spk06: Thanks, Ryan, and thanks for coming by and checking out the demos. Right now, as we've said in our prepared remarks, we're seeing strong growth with our Teams 1.0 business, if you will, over 100% seed growth year over year. As we think about Teams 2.0, it really is an opportunity to drive traction with what is already a fairly substantial Teams base through a significantly improved experience, versus what we offer in our 1.0 product, and frankly, as Vlad pointed out, what other competitors in the market are offering. And our motion there is really about targeting E1 and E3 users that don't have a Teams phone license and constitute the vast majority of the Teams users that are out there. And this plays directly into our BAU sales motion, if you will, where as part of the discovery process, we are talking to our customers about what solutions they're using today. Are they on an on-prem legacy solution? Some of them may tell us that they're a Teams user. And to the degree that they're a Teams user, then we pivot into offering the value and the benefits of our integrations, our analytics, you know, all, frankly, at one simple valuable price. And then to the degree that a customer needs contact center as well, CCaaS, we're able to integrate that and bring that to life. So to simply answer your question, there's a fairly material number of Teams users out there today. We continue to see that as a key growth opportunity for us moving forward, and it only gets better with our 2.0 solutions.
spk19: The next question comes from Brian Peterson with Raymond James. Please go ahead.
spk08: Congrats on the strong quarter, guys. So I just wanted to start on the enterprise in the top of funnel. I know you mentioned that ARR growth and the revenue growth and enterprise was the delta there. What are you guys seeing in the top of the funnel that gives you confidence that enterprise will step up in the back half of the year?
spk09: Thanks, guys.
spk06: Thanks for the question, Brian. Appreciate it. You know, as we think about the top of funnel, our lead flow is still quite strong. And as I mentioned a few minutes ago, we are seeing broad acquisition strength across the board. The dynamic that's in play and quite obviously driven by the macro environments is the upsell downsell. Two sides of the same coin are impacting our enterprise business. And so as the macro improves, our ability to sell our traditional product set into the enterprise organically will improve with it, one. And then two, and obviously this takes a little bit longer, but as you think about the new innovations that Vlad articulated, they become new cross-sell, up-sell opportunities. as well as an acquisition, a wedge strategy, if you will, the ability to go sell these new products as standalone and then pull through our UCaaS and CCaaS solutions along with it. So those are the dynamics that are playing out. Thanks for the question.
spk19: The next question comes from Matt Nicknam with Deutsche Bank. Please go ahead.
spk13: Hey, guys. Thanks for taking the question. I'm just curious if you can talk about the cadence of bookings over the course of the quarter, and more specifically, I guess, was there any drop off in March or any spillover into April. And then just one quick follow-up on small business ARR. Obviously, you know, very resilient. I'm just wondering if you can comment on what's driving the relative resiliency there, maybe relative to just midsize and enterprise. Thanks.
spk17: Sure. Hey, Matt. Sonali here. I'll take the first part of the question, and then I may hand over to Mo just on specifically on SMB. So in terms of linearity on bookings, as you know, we don't guide specifically on bookings. But I think in the current environment, it is worth giving you some color. I won't speak specifically month by month. But yes, we did see much more back-end loaded bookings. So March was the lion's share of bookings for this quarter. And as you know, we have guided or given some color last quarter around ARR growth being higher than total revenue growth for the full year 23, and we still expect that to be the case. And as you know, enterprise bookings anyway tend to be more back-end loaded, so we are seeing more of that trend in the current environment. So I'll hand over to Mo just on who can talk to the SMB trends.
spk06: Yeah, so thanks for the question. As you think about the opportunity to close cycle time dynamics, we articulated that we're still continuing to see elongated cycle times, these are the Q1 of last year. Now, as you think about SMB, SOHO and SMB space, obviously that opportunity to close is significantly faster. And one of the dynamics that played out for us during the quarter was frankly, very good execution by our marketing organization that we've talked about historically that we were going to rationalize brand spend, we were going to improve the efficacy of our marketing demand gen motion, and that is playing out. With less, they were able to drive more pipeline. That pipeline closes fairly quickly down market and is one of the reasons that you're seeing the strength in the numbers that we were able to put up.
spk09: Thanks for the question.
spk19: The next question comes from Peter Levine with Evercore ISI. Please go ahead.
spk05: Thank you for taking my question. Maybe, Mo, one for you is you called out Avaya re-emerging from bankruptcy. I guess you would have seen some kind of impact from the channel. Was there, I mean, I guess when they were in bankruptcy, was there an impact in the first half? And then if so, can you maybe quantify what that impact was? And then maybe second for Sonia Lee, you know, ARPU above 30, can you maybe dissect what core UCAS pricing looks like if you were to exclude contact center from that number? Thank you.
spk06: Thanks for the question, Peter. So to talk about Avaya, look, they just emerged from bankruptcy a few days ago at the very beginning of May. As we've said before, we're expecting that their contribution will ramp in the latter part of this year, obviously tied to putting the restructuring behind them. We're comfortable that the contractual provisions that we have in place are going to allow us to achieve the minimum commitment volumes that we talked about last quarter, as well as the enablement of new go-to-market motions, including wholesale integrations, additional integrations that we're building tied to Avaya Legacy Contact Center, et cetera, et cetera. And frankly, to the degree that they're not able to achieve those minimum commitments, if that ever happens, then we're comfortable that there's mechanisms in place to address that as well. So with that, Sonali, I'll turn it over to you to talk about ARPU.
spk17: Yeah, thanks for the question, Peter. So as you know, we look at and run the business and disclose ARPU on a blended basis, and I'm happy to say that the trend was stable there. As you know, CCAS has higher ARPU, significantly higher ARPU than UCAS. But even when you take out the... CCAS number from overall ARPU, they're generally holding steady. There was a little bit of weakness in UCAS relative to CCAS, but it's very, very mild. Overall, you know, very stable and stable within a range. And there was some, some of that was actually FX, to be clear. Some of the softness was FX, but it was, you know, very marginal.
spk09: Yeah. Spot on, yeah.
spk19: And no material change. The next question comes from Michael Funk with Bank of America. Please go ahead.
spk15: Hi, this is Matt on for Mike. Thanks for taking the question. It's great to hear that the demand environment is broadly holding up. Can you call out any incremental strength or weakness you saw in specific verticals this quarter?
spk06: Yeah, thanks, Matt, for the question. As we've talked about in previous quarters, The strength that we're seeing relative to verticals really ties back to areas that are very focused on what we call business-to-consumer, a.k.a. verticals and companies that sell or service end consumers as their customers. So healthcare, financial services, retail, professional services, public services, are generally the areas that value UCaaS and the services that we provide, frankly, because voice reliability, service, uptime, et cetera, has got to be rock solid because it's the difference between happy customers, thriving revenue, et cetera. So those are still the verticals that are doing really, really well for us and provide meaningful opportunity as we look ahead.
spk19: The next question comes from Matt Stottler with William Blair. Please go ahead.
spk07: Hey, everybody. Thank you for taking the question. Maybe just a follow-up, and maybe this one's for Mo, but it's based on something Sully mentioned earlier. And something you talked about last quarter was some efficiency improvement initiatives around partners specifically in shipping incentive structures and those relationships. Just maybe give an update on, you know, the level of acceptance you're seeing with those changes of partners and then any kind of early indications on the impact on productivity of those relationships.
spk06: Very good. Broadly, we did not see any impact year over year relative to our partnerships tied to the changes that we've made. As we disclosed last year, I'm sorry, last quarter, ALE and ATOS are no longer exclusive. We remain partners with them. They continue to have a large on-prem base, and they're going to be compensated as seats are sold. That's generally the model that we've been targeting. That model we find drives the right incentive structure and behavior. And then broadly from our channel partners, we're continuing to see that lead flow is steady. And no meaningful change quarter over quarter The only other comment that I'd make it going back to my prepared remarks Is the the launch of what we're calling the ring central ignite program? And we've had a variant of it out there for a while But we're really putting some you know wood behind the arrow if you will and what this program does is is serve as another way for us to help continue driving our sales and marketing percentage of revenue in the right direction over time. And how does it do that? One, it provides economic incentive for our partners to take on more of the sales and marketing motion themselves and not include our own direct sales base. This is a great motion. Many of our channel partners have long-standing relationships with on-prem legacy customers that they're now able to go work with, move them over to RingCentral, and do it without any additional incentive. This drives economic benefit for all parties. And early days, but we're seeing very solid interest from the channel partner community about this motion as well.
spk19: The next question is from Ryan McWilliams with Barclays. Please go ahead.
spk14: Hi, this is Damien Coghlan on for Ryan McWilliams. Thanks for having my question. I was just curious how your renewals fared in the first quarter, maybe compared to the fourth quarter, and if you've seen any changes in these customer renewals as a result of that.
spk06: Well, we don't guide on renewal, but what I'll bring you back to is a comment that Sana Lee made, which is, we're seeing the churn as a percentage is stable and doing well. As we mentioned in the enterprise space, upsell and downsell, frankly, two sides of the same coin. There is some pressure on the downsell side at the renewal timeframe as our enterprise customers who have been impacted themselves by the macro are doing some degree of rationalization of seats tied to their own needs. But again, broadly speaking, the churn percentage has remained stable quarter over quarter, year over year.
spk19: The next question comes from Catherine Trebnick with Rosenblatt Securities. Please go ahead. Oh, thank you for taking. It looks like we've lost our connection to Catherine. The next question comes from Terry Tillman with Truist. Please go ahead.
spk10: Great. Thanks for taking the question. This is Bobby Dion for Jerry. Just one on contact center. For those larger million-dollar-plus deals, is contact center attached still in the over 60% range, or has there been any notable up or down taking attached here to date? Thank you.
spk06: Stable. We're continuing to see our million-dollar-plus TCV deals have more than 60% attached of CCAS, and really this boils back to What we've seen historically, which is in the legacy UCCC space, about 60% of all of the CCCs sold were from the same vendors that were selling UC to those customers. It's a very obvious buying motion. It drives significant economic benefits to customers, as I laid out in my prepared remarks, recently validated by Forrester, an independent third-party consulting company.
spk19: Today's last question comes from Michael Turin with Wells Fargo Securities. Please go ahead.
spk04: Hey there. Thanks for speaking to me. Sonali, I just want to go back to margin. You're unlocking a lot of margin expansion in fairly quick order. You had some useful commentary around the sustainability of those improvements. Is there anything you can add around how you ensure you're driving the right level of optimization and still leaving enough in the tank for growth to hold in? about double digits going forward as well. Just curious on how you manage the balance through this. Thanks.
spk17: Yeah, sure. I mean, you've heard us say that we're focused on driving healthy, profitable growth. So, you know, we absolutely are and always will be a growth company. What I said in previous calls and tried to reiterate today is we are seeing the benefit of scale in the model. you know, we're actually seeing the profit potential of the business model starting to shine through. And that's from lots of efficiencies we found within the workforce, within optimizing our cost of customer acquisition. And you may remember last quarter when we talked about the actions we were taking, we were very specific not to touch frontline salespeople. And that is something that is still very much part of the RingCentral playbook in terms of becoming significantly more profitable and significantly more cash generative. We are protecting the P times Q selling motions within the portfolio. And some of the things that we've talked about, Mo was talking about lowering customer acquisition within the channel. I talked about vendor consolidation, reviewing contracts, rationalizing licenses, being disciplined about expense, being disciplined about hiring in some of the G&A areas, where we still have a bit of work to do, but we feel like we've come a long way. So what I would say is that we feel like we're getting the balance right. And I very much believe that we need to invest for growth And one of the great things about optimizing your cost base is it frees up cash to be able to invest in future growth. And, you know, that's what this team will be focused on.
spk19: Thank you all. And that concludes our call for today. You may now disconnect.
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