RingCentral, Inc.

Good day and welcome to the RingCentral second quarter 2026 earnings conference call. All participants will be in a 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 one on a touch-tone phone. To withdraw your question, please press star and then two. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Horwitz, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to RingCentral's second quarter 2026 conference call. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO, Kira Makagon, President and COO, and Vaibhav Agarwal, CFO. Our remarks today include forward-looking statements regarding the company's business operations, financial performance, and outlook. Thank you for joining us. Good afternoon and thank you for joining us. We delivered another strong quarter.

exceeding the high end of guidance across all key metrics. Total revenue, subscription revenue, and both GAAP and non-GAAP operating margins surpass expectations. Free cash flow generation also remains strong, and we now expect to deliver more than $7 per share for the full year. Given our quarterly performance and our confidence in the longer-term sustainability of our operating model and free cash flow profile, I am excited to announce that our board has approved an increase to our quarterly dividend to 12.5 cents per share. We are also making meaningful progress toward our medium-term target of reducing SBC to a range of 3% to 4% of total revenue. Our disciplined focus on profitability has put us ahead of schedule on GAAP operating margin, and we now expect to reach our 20% target within two to three years, a year ahead of schedule. We also remain on track to reduce growth debt to a billion dollars by this year end. This performance reflects a multi-year effort to strengthen our financial profile while transforming the company into an agentic voice AI leader. RingCentral is becoming an intelligence layer where AI agents and human agents work together to manage customer interactions end-to-end for better business outcomes. We believe the market opportunity is large, spanning UCaaS, CCaaS, and conversational AI, totaling more than $150 billion. This is based on estimates from IDC and Gartner. Further, we believe that the convergence of these disparate markets into a broader category of AI-powered customer engagement plays to our strengths, and that we are well-positioned to address this shift with one of the industry's broadest AI-powered customer engagement portfolios. We're investing over a quarter billion dollars annually in R&D to expand our portfolio, deepen our mode, and accelerate innovation. Voice is at the center of this transformation. It remains the primary way customers engage with businesses, through both human-to-human conversations and, increasingly, interactions between people and AI agents. Our carrier-grade platform serves approximately 600,000 businesses across 45 countries and supports international numbers in nearly 100 countries. It carries roughly 40 billion voice minutes annually and more than 3 billion text messages, both growing faster than our user base. Adding to our mode are billions of recorded and transcribed conversations that reside on our platform. This gives us invaluable learnings in delivering AI-native solutions that are best tailored to address our customers' needs. This wealth of data, combined with our infrastructure, scale, reliability, and decades of operating experience, create a high barrier to entry. In addition, the breadth of our product portfolio gives us the ability to cover all aspects of customer to business interactions, including person to person, person to informal contact center agent, person to a dedicated contact center agent, and, of course, increasingly, person to an AI agent. It is this ability to freely intermix AI and human agents while having both learn from the other that gives RingCentral a sustainable structural advantage. Unlike many AI point solutions that depend on third-party telephony or contact center stacks, RingCentral's agentic voice AI is built on our own global business voice network that is hard to replicate. It also integrates closely with our well-established cloud native product portfolio. This matters because most businesses want a single platform that can support, connect, and orchestrate across every customer interaction, whether to a human or an AI agent. This constitutes a clear competitive advantage for RingCentral. This advantage translates into strong adoption, broader portfolio penetration, and meaningful customer expansion. We're seeing the demand across every part of our go-to-market engine, direct, channel, and GSP, with customers and partners increasingly leaning in to adopt AI across the entire platform. Numbers don't lie. ARR from customers who utilized at least one of our native paid AI products now represent approximately 13% of ARR, having doubled year over year. These customers have net retention well above 100% and meaningfully higher ARR pool than the rest of our base. This momentum spans our entire AI portfolio. We ended Q2 with more than 16,000 paying AI or AI receptionist customers, which is up 400% year-over-year. Our AI conversation expert has more than 6,300 customers, growing more than 70% year-over-year. More broadly, ARR from our AI-led new products grew nearly 60% during the first half of the year. These new products also help us increase wallet share. One example is a large U.S. automotive dealership group with approximately 30,000 employees. Beginning with RingX in 2024, they later expanded into RingCX and AI Quality Management, and more recently rolled out AIR and QualQs across its dealerships. This has more than doubled their ARR over the last several months. Our new Customer Engagement Solution, or CEB, is another standout. CEB adds lightweight contact center capabilities to RingTX, such as call queues, shared SMS inbox, and analytics. CEB now serves more than 9,600 customers and has grown more than 80% sequentially. Our progress on product innovation wouldn't be possible without transforming ourselves into an AI-native company. This quarter, most of our product and technology employees, in partnership with OpenAI, executed an AI native project with over 99% success rate. This marks a major milestone towards RingCentral becoming an AI native company. We'd like to thank OpenAI for their guidance and support in making this happen. Another core strength and mode is our differentiated go-to-market, which includes direct sales, over 16,000 channel partners and resellers, and global service providers. Our AI and new products are resonating with channel partners. In fact, about half of our AI ARR originated from the channel. Partners investing in AI services and outcomes are winning, and we're building out programs around that momentum. We also have 16 leading global service providers in our network, and they remain an important part of our go-to-market strategy. These partners are increasingly bringing our AI products to the market. Recent wins include BT selling Ring CX and AI Quality Management to one of the UK's largest electricity and gas brokers, and Vodafone UK recently deploying AI-powered Ring EX at PwC, one of the big four consulting firms. To further build on our momentum, I am delighted to welcome NICE to our family of strategic resellers. Today, RingCentral and Nice announced an extension and expansion of our partnership, whereby Nice will begin marketing and selling Ring EFs in combination with CX1, while RingCentral continues to offer Nice CX1 to our customers. We now have a symmetrical, mutually reinforcing partnership that brings together two market leaders to deliver the future of AI-powered customer and employee experiences to businesses of all sizes. Also, in an effort to streamline customer experience and to better align with our respective strategic directions moving forward, we have recently restructured our relationship with Avaya. While RingCentral will remain Avaya's exclusive multi-tenant cloud UCAT offering, existing Avaya cloud of its customers and partners will transition to the RingCentral platform and brand directly. We see this restructuring as a win-win for RingCentral, Avaya, and most importantly for ACO customers and partners alike. We look forward to continuing to serve the ACO community under the RingCentral brand and working with them directly. Last but by far not least, this progress would not be possible without our outstanding people. I am delighted to announce that RingCentral was recently named to Time's list of America's Best Companies for 2026. recognizing employee satisfaction, financial performance, and sustainability over a three-year period. This important award recognizes the passion of our employees, the trust of our customers, and our focus on culture, innovation, and diffusion. I could not be more excited about the road ahead. With that, I'll turn it over to Kira.

Thank you, Vlad, and good afternoon everyone. As Vlad said, RingCentral is uniquely positioned as the most complete customer engagement platform with a gigantic voice AI woven across the portfolio. This quarter, we saw customers accelerate their adoption of RingCentral AI. For example, BGM Group, a national post-acute healthcare organization, deployed our full RingCentral AI portfolio, AIR, AVA, and ACE, on top of RingDX. AIR recovered 45% of their calls previously lost to abandonment. AVA eliminated manual note-taking. ACE delivered the call visibility and coaching to help them improve their customer interactions. They are now rolling out AI solutions to every department across the company. This example highlights the flywheel effect of more closely captured, less time spent on manual work, and more insights that make each interaction better than the last. Now, let me unpack our AI portfolio further. AIR, our AI receptionist, handles inbound voice calls and text messages. Deploys in minutes and works with businesses of any size. This quarter, we enhanced AIR with new spam blocking filters and lead capture that collect information at the right moment and syncs with Salesforce, HubSpot, and Zoho. Customers are seeing the impact of using AIR. Based on a recent survey, AIR customers reduced missed call rate From an average of 20% to close to zero. For example, GTR Insurance, a family-owned insurance business, said they are no longer buried in 50 calls a day and AIR is saving them $6,000 a month. That's time and money we are putting back into growing their small business. For customers with more complex use cases, AirPro enables businesses to create fit-to-purpose agents leveraging over 100 pre-built integrations, including EHR, CRM, scheduling, e-commerce, and billing. This quarter, we advanced our AI agents to handle multiple intents, retain context across conversations, and ask targeted follow-up questions to improve accuracy. We're excited about the traction with Aerpro since launching just a few months ago in early access. One example is the leading BPO achieved a containment rate of above 85% with no live agent transfers after using Aerpro together with their CRM integration. Another example. is a healthcare customer which added AIR Pro and ACE for integrated scheduling and customized lead qualification. The deployment succeeded quickly and they're already expanding AIR Pro to new use cases. That kind of rapid time to value is exactly what we're seeing across our portfolio. ACE are a conversation expert. Give sales, marketing, and compliance leaders complete usability across every call, automating reviews, replacing manual evaluations, and feeding conversation intelligence directly into their CRM and ticketing systems. In the last quarter, we saw a record ACE adoption with the number of calls processed jumping in double digits quarter over quarter. An example of a customer win this past quarter is one of the nation's largest healthcare workforce providers, which purchased nearly 700 licenses of ACE to improve their nursing placement conversation rate and enhance their recruitment training and coaching. TEB, our customer engagement bundle solution, is also scaling fast with a healthy attach rate of our AI products. A recent customer win is a financial services firm that chose TEB attached with ACE to manage inbound calls and SMS with automation. AI Support Agent Koji, and to have full visibility into cold queue volume with robust analytics. This example underscores the growing attached motion of AI with CEB. We continue to invest in strengthening our AI Pro offering with WingCFs. We added autonomous outreach enabling AI to proactively initiate conversations on its own. And when human judgment is needed, intelligent handoffs transfer full context to a live agent seamlessly. The market is taking notice. This quarter, both Aragon Research and Nucleus Research, namely CX, are leaders in their respective contact center reports, recognizing our AI investment, workforce engagement capabilities, and embedded contact center experiences. We are proud of this industry recognition and our ability to give customers powerful, right-side options across both informal and formal contact centers, and a clear path to grow with us as their needs evolve. With our unwavering commitment to innovation and well-differentiated go-to-market, we are in a strong position to drive AI-first customer engagement at scale. With that, I'll hand it off to Vaibhav.

Thank you, Kira, and good afternoon, everyone. Q2 was another solid quarter with all key metrics above the high end of our guidance. Our results reflect RingCentral's strong position in a growing market, durable TAM, well-established competitive moat, and rapidly emerging AI portfolio that is increasingly contributing to our performance. We continue to strengthen our financial profile through disciplined execution, Driving profitable growth, expanding gap and non-gap margins and free cash flow, reducing SPC, and executing a balanced capital allocation strategy across innovation, debt reduction, buybacks, and dividends. As Vlad mentioned, given our strong operating performance, demonstrable traction of our AI and AI-led products, and our confidence in the long-term free cash flow generation, We are pleased to announce that our board has approved an increase in the quarterly dividend to 12.5 cents per share. Together, these actions position RingCentral to deliver durable, profitable growth, strengthen our balance sheet, enhance capital returns, and drive sustained long-term shareholder value creation. Now let me turn to our second quarter results. Total revenue was approximately 657 million, up 5.9% year-over-year, and subscription revenue was approximately 634 million, up 5.8% year-over-year. Both came in above the high end of our guidance, reflecting the durability of our core business and increasing traction from our AI-led products. Customer trends remained healthy, including steady new customer rotations, and improving monthly net retention above 99%. These metrics continue to reinforce the resilience of our recurring revenue model and the mission-critical role our platform plays for customers. As Vlad mentioned, our AI-led new products are still early, but they continue to gain traction. Combined with the durability of our core business, they are improving the quality of our growth by increasing the ARPU and net retention while also expanding our long-term opportunity by increasing the TAM we are addressing. Turning now to profitability, we delivered another quarter of strong margin performance. Subscription growth margin remains stable above 80%. Non-GAAP operating margin reached 23.4%, up nearly 90 basis points year over year, and again above the high end of guidance. We believe our margin expansion trend is sustainable and supported by multiple structural drivers, such as scale benefits of our recurring revenue model, increasing contributions from our AI products, discipline hiring, expanded use of lower cost locations, vendor consolidation, Broader internal adoption of AI and continued focus on our highest return products and go-to-market motions. SPC as a percentage of revenue declined approximately 150 basis points year-over-year to 9% in Q2. We remain on track for SPC to be approximately 9% of revenue in 2026, down 180 basis points from 25%. This continued improvement reflects our disciplined approach to equity management. The combination of stronger non-GAAP margin and lower SPC drove GAAP operating margins of 7.7%, improving by more than 170 basis points year-over-year in Q2. As Vlad mentioned, we believe that we are ahead of schedule in reaching our target of 20% GAAP operating profit, now expecting to accomplish this milestone in the next two to three years. Turning to free cash flow, we generated 180 million of free cash flow in the quarter, up 25% year-over-year. This reflects strong operating performance, continued efficiency gains, and improved working capital, including certain one-time benefits from customers and partner prepayments, and continued discipline around vendor spend. Our recurring revenue model, Thank you for joining us. Structural margin expansion, disciplined capital allocation, and continued reduction in SBC provide a strong foundation for sustained free cash flow generation over time. As a result, free cash flow and free cash flow per share remain central to how we manage the business. Now let me turn to capital allocation. Our approach remains balanced and disciplined. We are investing in growth, delivering the balance sheet, and returning capital to shareholders. During the quarter, we reduced overall debt by approximately $85 million and lowered net leverage to 1.5x. Together in the first half of 2026, we have reduced our gross debt by about $130 million. We continue to make steady progress towards our goal of reducing gross debt to $1 billion by the end of 2026. Important to note is that we have no maturities until 2030 and we maintain 355 million of undrawn credit capacity. We also continue to return capital to shareholders. During the quarter, we repurchased approximately 2.2 million shares using approximately 94 million. At the end of Q2, we had approximately 326 million remaining under our repurchase authorization. Diluted share count declined 6% year-over-year to approximately 87 million shares. The durability of our free cash flow enables this balanced approach and gives us confidence in our ability to continue investing in innovation, strengthening the balance sheet and returning capital to shareholders over time. With that, let me turn to guidance. For fiscal 2026, we are raising subscription revenue to be at $2.55 billion to $2.561 billion, representing growth of 5.1 to 5.5%. Raising total revenue to be at 2.635 billion to 2.646 billion, representing growth of 4.8 to 5.2%. Raising GAAP operating margin to be from 9 to 9.7%, expanding 460 basis points year-on-year. Non-GAAP operating margin of approximately 23.6 to 24%. Raising free cash flow by approximately 20 million to 615 to 625 million, up 17% year-over-year. SPC in the range of 240 to 245 million, improving 180 basis points year-over-year as a percent of revenue. Fully diluted share count of 86.5 to 87 million shares, 5% lower year-over-year. raising non-GAAP EPS to be between $4.96 to $5.10, up 15% year-over-year. This results in free cash flow per share of $7.07 to $7.23 for the year, up 23% year-over-year. For Q3 26, we expect subscription revenue of $643 to $649 million, Total revenue of $664 to $670 million. GAAP operating margin of 7.2% to 8.6%, up 310 basis points year over year. Non-GAAP operating margin of 23.5% to 24%, up 100 basis points year over year. Non-GAAP EPS of $1.25 to $1.30, up 13% year over year. SPC in the range of 63 to 67 million, improving 60 basis points year-over-year as a percent of revenue. Fully diluted share count of approximately 86.5 million shares, lower by 6% year-over-year. In closing, Q2 was another strong proof point of the durability and the efficiency of the RingCentral model. We exceeded the high end of guidance across all key metrics. Expanded both gap and non-gap profitability, generated strong free cash flow, reduced debt, returned capital to shareholders, including increasing the dividend, and continued to reduce dilution. At the same time, we are investing in innovation and seeing early AI traction contribute to our growth profile and revenue quality. With free cash flow per share now expected to exceed $7 this year, we believe RingCentral is well positioned to continue compounding shareholder value. With that, let's open the call for questions.

Thank you. Subtitles by the Amara.org community The first question will come from Elizabeth Porter with Morgan Stanley. Please go ahead.

Hi, thanks so much for the question. I wanted to follow up on AIR, including the recent expansion with AeroPro last month. Can you provide any more detail around how this will act as a tailwind to some of the expected economics that a typical ring CX transaction, whether in terms of AI attach, ACV, or the competitive win rates, just relative to the existing CX offering? Thank you.

Yes. Hi, Elizabeth, Vlad here, and thank you for the question. Look, I would answer it this way. AIR, AIR Pro, AVA, ACE, it's all part of our transformative transformation towards an AI-led company. And look, we predate AI-native, you know, that's obviously the fact of life. But we are turning ourselves into a company that thinks and operates like an AI-native company, including our recent announcement with OpenAI. But to the point of your question, various flavors of AI, including AIR Pro, That is the new UCAS and CCAS, how we see it. AI is rapidly becoming an integral part of the offering. We are, to the financial part of your question, we're absolutely able to charge extra dollars for it at a good margin. and for the simple reason that combined solution is, you know, it basically saves customer time and money. It saves on human agents, but it also empowers remaining human agents and makes them more productive. And what makes RingCentral quite unique is the industry and with our, you know, approach and our various modes, is the fact that we are able to power both human agents and AI agents and make them work closely together while in a way learning from each other. So our AI, and we're in a unique position to do this, our AI is able to learn from human agents, both in real time, as well as from literally billions upon billions of recordings that are already sitting on our platform. And similarly, our human agents are also able to learn from AI, sometimes in real time, based on all of the new data that's now being generated by our AI agents. So, in a nutshell, that is the promise of AIR and, frankly, even more so of AIR Pro, which has deeper intelligence and deeper integrations. And, you know, that's what we call this, you know, flywheel, which is, you know, really a virtuous circle, if you think about it. Everything just becomes stronger together. So, moving forward... We strongly, strongly believe that AI is going to be a major tailwind for us as a company, both growth-wise and margin-wise. Unlike, you know, the bear case, hopefully, that's dissipating now, the fact that AI is going to mean less business for Inc., we're seeing exactly the opposite. It means more business for Inc.

Great. Thank you. And just for a follow-up, I wanted to ask about the expanded partnership with NICE and how investors should think about the incremental revenue opportunity and channel economics. In particular, does this open up NICE's enterprise install base to Ring EX, or how does it change the competitive positioning of Ring Central and the larger UPAC plus CPAC institutions?

Yeah, I mean, look, that's exactly the idea. I mean, hopefully, that's exactly what you say. Knife is a well-known enterprise player. We have, as you all know, a multi-year partnership with them. And, you know, it went through various phases. If nothing else, as you've been seeing over the last, you know, year or so, the partnership has been strengthening. And with this current latest announcement, you know, I don't know what other proof points you need, that things are, you know, live and well between the two companies. But market positioning-wise, our Ring Central Contact Center, powered by NICE, you know, just because of the nature of most of our business, you know, most of it has been in the mid-market. At least, you know, certainly as far as number of logos are concerned, but even though we're all just business, I mean, we have some very large accounts. We won with RIMCC, but, you know, again, majority is more myth, you know. Nice in contact, you know, on their own volition, they're a pure enterprise company. They have very, very large accounts. They're and one of the two undisputed industry leaders in high-end enterprise of CCAT. And this is just a great testament to the fact that they are now also seeing that UCAT and CCAT are stronger together, not just in the main market, but also in the enterprise. So we're super excited and hope that there will become a meaningful new channel for us in this very, very important segment. and I think as the press release and you read Scott's quote and my quote, all of this becomes stronger with AI. There are AI assets, our AI assets, much of it is complementary to each other. So I will always be of the opinion that providing a customer of any size with a unified solution with a single straw to choke That is a customer-friendly gesture. That is what customers want. And now more customers will be exposed to it. So I'm super excited about this.

Great. Thank you.

Thank you.

The next question will come from CT Panegrahi with Mizuho.

Please go ahead. Thanks for taking my question, Vlad. Are you seeing AI picking up momentum How do you see your product sets in the AI evolve? And how do you see the TAM expanding for RingCentral? And specifically, how do you see your customer spend evolving? Are you seeing that to increase, decrease? Or where do you see that incremental spend will come from customer base?

Let me answer it this way. Again, just looking at the numbers that, as we all know, don't lie, you know, what do we see? We see more of our customers buy AI from us, okay? I want to say, and I'm being very specific here, not just use AI, because many people will claim AI, but they're just giving stuff away. We're also giving lots and lots of stuff away in AI, but The stuff that is differentiated, where we have mouths around, that's the stuff we charge for. So just concentrating on that portion of the customer base that is buying AI products from RingCentral, and these are, I really want to stress this, these are our natively developed products, not third-party, we're not OEMing, you know, for this calculation, okay? So number of customers, that you think at least one paid AI product from Accentral has doubled year over year. It's about 13% of revenue, you know, which is give or take $300 million, if I can do it in my head, yeah? Okay, so that is a substantial business. And what else do we know about this business? It is also more sticky. So the net retention for this cohort is over 100%, okay?

which is really good news.

So, you know, to be blunt, when people say, hey, you know, SaaS is going down and Ring in particular is a melting ice cube, you know what, not so much, not so much because AI and AI-affected revenue is growing. It's, again, doubling with meaningful numbers already, you know, and retention is over 100%. Moving forward, We're optimistic we'll be more of the same, okay? Our AI products are only getting better. We are spending 250 plus million dollars per year on innovation. More and more is going towards AI. We are... On the map now, AI natives and foundational model people like OpenAI are taking notice. This is why, you know, they're showcasing their relationship with us, perhaps. And by the way, once a week, spread my thank you to OpenAI and their team working with us. It was an amazing eye-opening project. But tell you what, RingCentral now has Over 2,000, well over 2,000 people who have completed a native AI project. I don't know how many other companies in the industry or in general can claim that. So we will be accelerating. We'll be doing more product for more customers. And again, going back to my answer to Elizabeth's question, I just want to reiterate, where we have natural modes are, of course, our network and our presence and our channel and our GSPs, all of that. But also very importantly, the fact that we have this portfolio that can do everything. People and AI agents all together, and the people part of it goes all the way from a high-end contact center down to a customer engagement application with maybe a few folks talking to their customers. So for as long, this is the core belief and the core bet. For as long as consumers are calling or texting their business providers of any type, we'll be fine. And do believe we'll only be stronger.

Thanks for that color, Vlad. And Vaibhav, it's good to see you raise free cash flow now by $20 million. I wanted to ask the capital allocation strategy, one way you are raising dividend and reducing debt. But what about in reinvesting to reactivate growth?

Yeah, thank you for the question. So in terms of capital allocation, look, there's no structural change. You know, it's around having a balanced and a disciplined approach and it's centered around improving free cash flow. And as you rightly called out, we are generating high quality and global free cash flows now. which give us the flexibility to deploy capital across multiple priorities. The priority is investing in growth, which Vlad just talked about, investing in innovation, particularly take the advantage of the massive AI opportunity in front of us. Secondly, in terms of the balance sheet strength and profile,

Our leverage is at a healthy and understandable level.

We are continuing to pay down debt and remain committed to bringing down growth at $2 billion by the end of the year. And thirdly, it's about returning additional capital through a combination of buybacks and dividends. At current stock levels, buyback remains an attractive opportunity. We continue to buy back stock like we did in Q2.

We are lowering our share count, which is now at 290 levels.

And given the strength of our free cash flows, our board markets and exceeds in our quarterly dividends.

Again, it's a reflection of the confidence in our global board profile and long-term sustainability of our free cash flows.

And to your last comment, look, it's not coming at the expense of growth.

In fact, it's the opposite, I would say. It's an outcome of driving durable growth and strong free cash flows. And it provides more predictable returns to our shareholders. So NetNet, look, we are a compounding free cash flow model built on a durable recurring revenue base, you know, with a growing AI portfolio and consistent cash circulation. and we are focused on allocating capital in a way that .

Great. Thank you.

The next question will come from Tim Horan with Oppenheimer. Please go ahead.

Thanks, Vlad. There are two questions, one for you, Vlad, and one for you, Dave. But Vlad, it seems like AI is transforming business for online utility and I think usefulness. For existing customers that are using it, are you seeing an increase in our acceleration of the minutes per month that they use it or how they use it both wired and wireless? And are you starting to win new customers because of AI? And do you think this might accelerate the migration to the cloud for the industry?

Yeah, really good question. So yes to all of the above and more. Firstly, as far as usage is concerned, We're seeing minutes usage increasing across the platform, and that's ahead of our revenue growth or seed growth, okay? So that means deeper engagement just across the whole network, that's with as well as without AI. And it's phone calls, it's text messages. Everything is... growing meaningfully faster. And I have to say that many people don't realize that we're becoming quite a sizable provider of business SMF, and that is growing strong double digits for us. Also, which is meaningful, basically. So, that's one. Now, within AI, with AI in particular, AI ends up Connected more calls. So there is just less dropped calls. Why? Because people at this point are not too keen on leaving voicemail and air is specifically optimized. for ideally resolving the call right there and then. So that's not a dropped call. But if it cannot, and by the way, the only reason it cannot is that the customer hasn't taught it how to do. You know, the customer has the tools to teach. So we're working with them to try to get more and more deflections. But at the very least, it's able to figure out who to direct a call to, you know, from a life agent perspective. So that is absolutely, that kind of bottoms up you on why AI customers are using, in the end, are using more minutes, which, you know, in the end is good for our business. It's just deeper engagement. And I think your last question was, is AI helping sell us new products? 100%. I mean, we... You know, easily half of our new sales includes AI. Easily half of channel sales includes AI. Easily half of AI sales comes from the channel, right? So they're kind of multiple sizes of the same coin. But I tell you what, I really do believe that if you were to fast forward a bit, I don't know, you know, are we talking a year or two, maybe less? I don't know. but I think the entire definition of UCAS and CCAS will need to include AI. The days of just the siloed, hey, let's just connect a person to another person or a person to a group, those days are numbered and we recognize this and we believe we'll be one of the winners, hopefully one of the major winners of this movement as we are able to embed AI at every stage of a consumer-business interaction, starting with before a human, during human, and after a human, as in processing a code transcript or recording and making it all work together. And that is a unique position and this unique five wheels that I keep talking about.

Thank you. And Vaibhav, can you give us what you think the normalized free cash flow margin was in the quarter? And is there any reason as you're expanding the gap margins that a good chunk of that wouldn't continue to slow down to free cash flow margins expansion over time?

Thank you for the question, Tim. Look, we've done a lot of work over the years around free cash flow expansion and have driven improvements over the years. And that remains a key focus and central to how we manage the business. Drivers of free cash flow expansion are twofold. It's improving profitability coupled with working capital efficiency. You know, in Q2, we had both. We've been improving margins quarter over quarter, year over year. And we got some working capital improvement benefits from customer prepayments. Overall for the year, we are raising FY26 guide by about 20 million to reflect again both operating margin expansion and working capital efficiencies. The one thing that's important here, Tim, is that this expansion is structural in the sense that we have a scaled revenue model with strong ARPUs, net retention rates, and gross margins. So that creates an embedded operating leverage in the model. Their revenue growth is outpacing expense growth. And again, that's supported by our discipline and cost management around hiring and, as Vlad indicated earlier, increasing use of AI within the company. And free cash flow per share is growing faster. So, again, overall, you know, there will be quarterly volatility in terms of the trends. There are multiple structure drivers to drive that free cash flow. And overall, we feel good and confident about the long-term sustainability and improvements in both operating margins and free cash flow. And this is one of the primary reasons why our board approved a dividend, an increase in the dividend, if you will. Again, it ties back into the Confidence around the durability of our growth profile as well as the long term sustainability and durability of the free cash flow profile. Thank you.

The next question will come from Brian Peterson with Raymond James. Please go ahead.

Thanks and congrats on the strong free cash flow number. So, Vlad, I wanted to follow up on your comments on the AI attach rates. I mean, you mentioned there are 50% of debt new. I'm curious if that differs by segment, if maybe S&B is adopting faster and enterprise is taking a more wait-and-see approach. We'd just love to understand how that adoption looks across the different segments.

Yeah, look, we generally tend to not break things up by segment, as you know. but holistically, look, smaller businesses are faster to adopt, you know. Decision making, you know, is faster, is more streamlined, there are less committees, you know, just selection process is simpler. So, yeah, I mean, because these products are early, I would say that they tend to lean smaller for us, which, by the way, is another source of strength, right, because You know, quite a few, you know, not quite a few, it's not such a large field, but some of the better-known AI natives, you know, they just concentrate top market and enterprise, and that's just great. But, you know, U.S. economy, you know, is 40% small, not even SMB is just small. So there is something to be said about the two. But there is adoption throughout, you know. I mean, we have large logos, we have smaller logos. are seven-digit TCV deals. Again, majority, at least 30% are using AI. We see AI as, again, becoming more and more just an integral part of core requirements. It's just kind of like mobile. We have a hard time selling much product if we do not have smartphone support. And people used to ask about that, and I think I gave a similar answer back then. And AI is becoming that. It's just becoming a table stake that you have to have, and those who are good at it and those who have a moat and a differentiated approach will win, and will win big.

Thanks, Vlad. And, Vaibhav, maybe a follow-up, just in terms of the dividend increase. I'd love to understand why now. I know you guys have been deploying capital multiple different ways, but I'm curious what led to that decision to raise the dividend. Thanks, guys.

Thank you, Brian, for the question. So, look, again, it comes back to my previous comment around we are generating a high-quality, durable, free cash flow, and we've guided to around $600 billion. That allows us to deploy capital across multiple priorities. Again, we are investing in growth. We are delivering stock and dividends. That's another way to return capital to shareholders in a more predictable way.

I still want to add to that. Look, I think there is a core belief here that AI will not only help us accelerate our sales, but will also in the end Be margin accretive. And simple reason for that is that we are able to move now meaningfully faster with our product development cycle. Again, I refer you to the open AI study we just published. But it's even beyond just R&D or just product and tech. It's across the org. Everyone is becoming more efficient, okay? So we will either be able to accomplish a lot more, which is what we're hoping to do, or at the very least become more efficient in what we are already accomplishing. So yeah, we feel good and strong about our outlook on numerous fronts, including cash flows. And, you know, this is one way to return capital to shareholders. We've been, you know, a public company for 13 years now. And we kind of think that this is, you know, it's not the earth.

The next question will come from Andrew King with Rosenblatt Securities. Please go ahead.

Hey, guys. Thanks for taking my question. Really nice quarter. Just wanted to ask a little bit more explicitly, can you give us a little bit more detail into the drivers of the repeat? And then within that, Kira, you called out some really nice product wins during the call. Can you just give us any more colors as to the momentum of new products?

Yes. Hi, Andrew, and thanks for the question. So on new products, what's driving this is, let me just give you an example of the latest product, one of the latest that we introduced, our customer engagement business solution. That's a good one that's off to a great start. As you can see, almost 10,000 customers just having lunch at the end of last year. And the reason this is resonating with customers is that it is, It's used in a need that hasn't been met before, where you have an informal contact center that works for employees, handle calls, handle texts, but they're not dedicated agents. So they have high volume of call queues, SMS, they need deep analytics, and they don't need a complex contact center, they don't need a contact center at all, but a little bit more advanced than a typical phone product. And so that's what's resonating, and it's from, you know, we build a product that is easy to adopt, manage, and it's natural for new customers and also our existing customers are extending with it. And it's natural that touches our AI products, such as AIR and ACE, because on these inbound queues, you have the need to be able to handle these. Thank you very much. They're simpler. And so all of our products work together there. And there's the flywheel that Vlad talks about that becomes a product flywheel and a customer value flywheel. And as to the point, I think your first question was air. Well, air is unique in that it is really easy to deploy. is really easy to use, and businesses of all sizes have this need of having to be able to answer and handle calls. If you're a small business and you miss a call, this is your business that is struggling. And I've given those examples in prepared remarks and the script that basically point to small businesses Not being able, you know, improving their business materially, small numbers, but for small businesses, very material. And for large businesses, the numbers get compounded. And so that is not very typical for most IBA-type products, where we take out the complexity, and we can get value to customers literally in minutes and days of deployment.

Great. And if I just squeeze one more in there quickly, could you just give us an idea of how you're balancing your R&D investments between delivering more AI products versus delivering more vertical-specific packages to try and replicate the success that you've seen within healthcare?

So, some of it is, as we talk about AI helping us build AI products, so that certainly is a big accelerator, and we're seeing good success in healthcare, and as we're seeing good success in healthcare, our platform allows us to scale vertical solutions with our AI products, and so... For example, we have this BPO that actually handles a multitude of cases. Because it's a BPO, the number of use cases that it handles is not vertical, specific in one vertical. It has a number that deals with, for example, enrollment in schools, enrollment calendar handling for them, filling out job applications, openings, Handling of information and use cases that are quite diverse. And so our platform is very adapted doing that and expect us to roll out additional specific templates for verticals where we traditionally do well, which includes financial services, assurance ultimately, retail, and so on.

Great. Thank you.

The final question will come from James Fish with Piper Sandler. Please go ahead.

Hey, guys. Appreciate the questions here. Is there a way to think about now that AI has become over 10% of ARR, how much of an impact it is having a gross margin? Because that subscription gross margin did come in a little bit lighter than what we were looking for, and I'm guessing it has a lot to do with that. And then I just have a quick follow-up.

Maybe I'll take the first part of the question. And look, I just want to make sure we're using the same, just for clarification purposes. It is revenue from customers with at least one paid AI product that is now over 10% of the revenue, like we've just called 13%. We have not yet talked about just pure AI revenue, and partially for the reason that that may not even be that relevant, that indicative, because our goal is to embed AI across the entire portfolio. So we will be moving forward, most likely differentiating less and less between pure AI revenue and AI effective revenue with latter really how we run the business. Because that is exhibiting the exact patterns that we wanna see, which is better engagement, better stickiness, better R pools. So certainly from a top line perspective, it's a great tailwind From the margin perspective, look, we've been able to hold our own so far. You know, we're judicious. We are, you know, doing quite a bit, you know, in the way of, you know, optimization and, you know, model shopping, if you will. So right tool for the right task. And that is a big part of the effort. and they know that there is certain inherent dangers as well. You know, tokens are not inexpensive, and they're not, but I mean, so far at least we've been able to maintain margin, a healthy margin on our paid AI. Anything to add, Vaibhav?

Yeah, so I think a couple things to add, Jim. So gross margins are still at above 80%, so they're still healthy. As Vlad said, ARPUs continue to hold steady. In the core business, we get the benefits of our multi-tenant SaaS platform. On AI itself, the margins continue to be strong. Within that cohort of customers that Vlad articulated, we are seeing better ARPUs and NRR net retention rates. Now, keep in mind that these new products are still ramping. So we will get more efficiencies over time. And again, look, there'll be some volatility or variability quarter over quarter. Overall, from a gross margin standpoint, our expectation is that it will remain at around 80%.

Got it. And just on my follow-up, obviously the NICE expansion and extension is good to see, but any update on sort of how to think about where ring CX Powered by Ring, Stops vs. Nice Powered by CX1, Starts. Is there any update to that? And how was customer penetration on that product this quarter? Thanks, guys.

Yeah, without drawing a bright line, because there is no bright line, but CX is generally more of a mid-market product so far. There are some notable exceptions. We have some very, very large customers on CX as well. but I would say there's still more of an aberration. If you need deep custom routing, if you need very, very deep human-facing analytics, CS1 is the industry leader and there is a reason for that. If you need quicker, faster, less expensive deployment, A lot less professional service, you know, a little bit sort of newer product, you know, look and feel wise maybe, than Ring CX, you know, would be the one to go with. I think it's great that we are now able to offer both. And obviously, NICE is now able to offer Ring EX into their customer base. and it's just another tool in the toolbox. You never have enough.

This will conclude our question and answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect.