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Edited Transcript of RNG earnings conference call or presentation 10-Feb-20 10:00pm GMT

Q4 2019 RingCentral Inc Earnings Call

San Mateo Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of RingCentral Inc earnings conference call or presentation Monday, February 10, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anand Eswaran

RingCentral, Inc. - President & COO

* Mitesh Dhruv

RingCentral, Inc. - CFO

* Ryan Goodman

RingCentral, Inc. - Director of IR

* Vladimir G. Shmunis

RingCentral, Inc. - Founder, Chairman & CEO

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Conference Call Participants

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* Andrew King

Dougherty & Company LLC, Research Division - Research Analyst

* Bhavanmit Singh Suri

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications

* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Heather Anne Bellini

Goldman Sachs Group Inc., Research Division - MD & Analyst

* James Edward Fish

Piper Sandler & Co., Research Division - VP & Senior Research Analyst

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Michael James Turrin

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Nandan Girish Amladi

Guggenheim Securities, LLC - Director of Technology, Media & Telecom equity research practice

* Nikolay Ivanov Beliov

BofA Merrill Lynch, Research Division - VP

* Richard Frank Valera

Needham & Company, LLC, Research Division - Senior Analyst

* Samad Saleem Samana

Jefferies LLC, Research Division - Equity Analyst

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

* Terrell Frederick Tillman

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* William Verity Power

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the RingCentral Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Goodman. Please go ahead, sir.

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Ryan Goodman, RingCentral, Inc. - Director of IR [2]

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Thank you. Good afternoon, and welcome to RingCentral's Fourth Quarter 2019 Earnings Conference Call. I am Ryan Goodman, RingCentral's Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Anand Eswaran, President and Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand and Mitesh, followed by Q&A.

Some of our discussions and responses to your questions will contain forward-looking statements. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. I encourage you to visit our Investor Relations website at ir.ringcentral.com 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. 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. With that, let me turn the call over to Vlad.

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [3]

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Good afternoon, and thank you for joining our fourth quarter earnings conference call.

We delivered an outstanding fourth quarter with continued strength in mid-market, enterprise and channel. Additionally, we had a number of major announcements and achievements during the quarter.

First, I am pleased to announce that we finished the year achieving an important milestone, namely, we have surpassed our long-term goal of $1 billion annual revenue run rate ahead of schedule. This is a significant achievement for RingCentral, and we continue to be the largest and fastest-growing pure-play UCaaS vendor.

In October, we announced our strategic partnership with Avaya. In November, we announced that we expanded our relationship with AT&T. And today, we announced our first strategic system integrator partnership with Atos. On the leadership team, we added Anand Eswaran as President and Chief Operating Officer. I'll expand on these key announcements later after a review of Q4 results.

Revenue and non-GAAP EPS exceeded the high end of our guidance. Key drivers continue to be mid-market, enterprise and channel. We continue to see strong contributions from our vertical market initiatives focused on financial services, health care and education. We also saw another strong quarter from contact center.

Key metrics for Q4 were solid across the board. First, total revenues grew to $253 million. This is a 34% increase year-over-year and is above the high end of our guidance range. Mid-market and enterprise continues to be a key driver of our performance. We define mid-market and enterprise as $25,000 or more in annual recurring revenue or ARR. This grew 59% year-over-year and is now a $479 million business. Enterprise, defined as customers with $100,000 or more in ARR, grew 71% year-over-year to $293 million. Channel ARR grew 63% year-over-year to $300 million.

Overall, 2019 was a transformational year for RingCentral as we extended our leadership in the UCaaS market. Looking forward, our technology leadership, experienced management team and unique strategic partnerships put us in a better position than ever to maximize our opportunities in the $50 billion-plus UCaaS market.

On that note, I'd like to welcome Anand Eswaran to the RingCentral team as President and Chief Operating Officer. Prior to RingCentral, Anand was Microsoft's Corporate Vice President for Global Enterprise business. Anand will be responsible for leadership and execution across products, engineering, sales, marketing, services, customer care, operations and human resources.

I'd also like to take a minute now to express our gratitude to Dave Sipes. Dave announced that he will be retiring from the company at the end of Q2. Dave has played a pivotal role in RingCentral's journey from an approximately $10 million revenue company to our current $1 billion run rate. Dave, we wish you all the best in the next stage of your journey and look forward to your continued friendship and mentorship.

I'll now provide an update on the strategic partnership front. First, the Avaya partnership. We attended Avaya's ENGAGE user conference last week, where we showcased a first look of Avaya Cloud Office by RingCentral or ACO. Feedback was positive from customers and channel partners. RingCentral and Avaya teams are working together well. ACO is well on track for its scheduled launch at the end of this quarter. The marketing, sales and support teams have made solid progress to ensure customer success and training efforts are well underway with sales and channel partners.

Next, AT&T. In November, we announced that we expanded our relationship with AT&T. AT&T made Office@Hand by RingCentral a lead offer for UCaaS as part of its voice and collaboration portfolio. It has been a few short months, but we are already starting to see encouraging trends that are exceeding our initial expectations.

And today, I'm excited to announce our first strategic system integrator partnership with Atos. Atos is a global leader in enabling enterprise digital transformation with annual revenue of approximately $13 billion. The partnership will help extend RingCentral's reach into large enterprise accounts moving forward with digital transformation initiatives. As part of this partnership, we will introduce a co-branded UCaaS solution. This co-branded solution will be a key part of Atos's digital workplace solutions.

To wrap up, 2019 was a stellar year. We are still in early innings of the global cloud communications transformation story. We are well positioned to further extend our leadership with our commitment to innovation, customer-first mindset and the unique strategic partnership strategy. With this momentum in place, it has never been more clear that the cloud is winning and RingCentral is winning in the cloud.

Now for some color on Q4, I will turn the call over to our new President and COO, Anand Eswaran.

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Anand Eswaran, RingCentral, Inc. - President & COO [4]

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Thank you, Vlad.

I'm humbled and energized to join Vlad and the RingCentral team. We are at an inflection point in the way we communicate, collaborate and work. As every company transforms to be a digital business and workplace, RingCentral is uniquely poised as the leader in UCaaS to partner with these companies in their digital journeys. I am so excited by the large opportunity ahead of us to transform business communications globally.

I also want to thank Dave for building an exceptionally strong innovation and go-to-market team, which has taken RingCentral to $1 billion run rate. I have enjoyed getting to know Dave really well as we spend every minute together, partnering and working through the transition. Thanks to Dave for the help and support.

I will now provide some color on Q4. Q4 was again a strong quarter. It was driven by strength in mid-market, enterprise and channel. We continue to win based on our superior platform and differentiated go-to-market capabilities. First, our platform, which integrates voice, video and team messaging continues to resonate with our customers. Our open platform ecosystem expanded to nearly 30,000 developers. I'm also excited to announce that we surpassed 3,000 certified integrations. The ease and flexibility with which our customers can integrate business applications with our communications platform is a game changer. In fact, over 70% of our 7-figure wins in Q4 cited open platform as a key capability in their decision to go with RingCentral.

An example of where open platform and mobility were key is a Fortune 500 utility company with approximately 8,000 users. They replaced legacy on-premise Cisco Systems with RingCentral Office. Integration of multiple business applications with RingCentral Office, including Office 365 and Workday, was important for the customer. Additionally, the ability of field employees to be connected to a single enterprise communication solution using rugged Caterpillar mobile devices was important. We saw upmarket strength in our focused vertical markets of financial services, health care and education. In aggregate, during Q4, these accounted for over 40% of our 7-figure wins.

In financial services, we had a standout quarter. First, we are excited to announce a win with Arch Capital, a global leader in providing specialty insurance and reinsurance solutions. We are pleased to see a Global 2000 multibillion-dollar enterprise like Arch Capital select RingCentral for their global cloud communication needs.

Another financial institution win in the quarter was Credit Human, a large credit union based in San Antonio with members across the country. The ability to integrate a complete unified communications platform with key financial services applications, including Jack Henry, was an important differentiator in securing this nearly 1,000-seat win.

In health care, we secured a 4,500-user win with Aveanna Healthcare, the nation's largest provider of pediatric home care. They wanted to standardize to a single communications experience across approximately 240 locations, including headquarters and regional offices. Our ability to provide a single unified solution with high reliability was key to this win.

In addition, our mobile capabilities were a strong fit with the home care business model. We also signed a 3,600-user win with U.S. Renal Care, a leading provider of dialysis services. This customer needed a single communications solution across more than 300 locations. They also needed the ability to integrate with existing paging systems.

In higher education this quarter, we had a win with National American University. Our unified platform with integrated team messaging and the ability to implement custom emergency workflows were key driving factors in this win.

Let me now provide a brief update on the success we are having with contact center. Over half of our 7-figure wins included contact center in Q4. Contact center is a key element of our land and expand strategy. For example, earlier this year, we secured a 10,000-seat win with a Fortune 1000 multinational software company. In Q4, this customer added 150 contact center seats. Also, earlier this year, we secured a nearly 6,000-seat RingCentral Office win with Crawford and Company, and in Q4, we added over 400 contact center seats.

Additionally, in Q4, we delivered a marquee win for Engage Digital, our native digital customer engagement solution. Richemont is a well-known Switzerland-based luxury goods holding company of many luxury brands, including Montblanc. They needed a single digital customer engagement platform across 8 of their luxury brand divisions. Richemont plans to deploy Engage Digital globally on several digital channels, such as Facebook, Instagram and Messenger.

We also continue to see increasing traction with our native Engage Voice outbound blended solution with a record number of wins last quarter. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

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Mitesh Dhruv, RingCentral, Inc. - CFO [5]

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Thanks, Anand, and welcome aboard. Looking forward to working together as we scale RingCentral to the next level. I'd also like to express my gratitude to Dave for the terrific partnership over the years.

Good afternoon, everyone. 2019 was a solid year on several key fronts: first, we exited the year with a revenue run rate of over $1 billion; second, we grew 34% with an operating margin of over 9%, executing above the rule of 40. We delivered on the $1 billion and the rule of 40 a year ahead of commitment to our shareholders. These milestones are a testament to the large market opportunity as well as RingCentral's focus on consistent execution. We believe that the rule of 40 is a key metric to evaluate profitable growth across SaaS companies and is a high bar we will strive to sustain. Third, we are winning larger enterprise customers with well over 100 7-figure TCV deals for the year. And finally, we signed an industry-redefining partnership with Avaya.

Our fourth quarter capped the year with strong performance on all key financial metrics. Total ARR grew to $960 million, up 32% year-over-year and ARR for RingCentral Office, our core UCaaS solution, grew to $877 million, up 36% year-over-year. Key drivers continue to be mid-market and enterprise with a record contribution from channel partners.

Mid-market and enterprise had another strong quarter with ARR up 59%. This was bolstered by enterprise ARR growth of 71%, driven by digital transformation momentum at large-scale customers. Overall, mid-market and enterprise yet again accounted for over 60% of new bookings. Higher upmarket mix is a positive indicator of our profitable growth, given better lifetime value. Channel partners are a key element of our strong momentum with larger customers. Channel ARR reached $300 million in Q4, up 63% and also accounted for a record number of our 7-figure TCV deals. We continue to broaden our channel network and deepened relationships with key partners, such as Carousel, Telarus and Westcon.

Upmarket and channel drove strong results across the board in Q4. Total revenue grew 34% to $253 million. Subscription revenue grew 33% to $229 million. Non-GAAP subscription gross margin was 82%. Non-GAAP operating margin was 9.6%. Non-GAAP EPS of $0.22 was above our guidance. Operating and free cash flow includes approximately $37 million of onetime payments stemming from our recent partnerships. Excluding these items, our free cash flow margin would have been approximately 8%.

Now let me provide some financial color on our recent partnerships that we believe to be additional drivers of our long-term performance, starting with the latest news first. As we announced today, Atos will become a strategic SI partner to RingCentral. We expect RingCentral to accelerate its large enterprise reach by joining Atos's digital transformation portfolio. Given the sales cycles for larger enterprise, we are not assuming much contribution from Atos in 2020.

And now for our industry-redefining Avaya partnership. ACO is on track for launch at the end of this quarter. We have received positive feedback and interest from both customers and partners alike. As we mentioned before, it will take time to ramp the go-to-market motion following the launch. As such, we continue to expect revenue contributions from ACO to start towards the end of 2020.

Now to the 2020 financial outlook. We expect total revenue to be between $1.125 billion and $1.135 billion for an annual growth of 25% to 26%. We expect non-GAAP EPS to be $0.93 to $0.94 based on a fully diluted share count of 94.5 million. This reflects additional imputed shares from the convertible debt due to stock price appreciation as well as shares issued to Avaya in November. Excluding these items, our EPS guidance range would have been $0.04 higher.

In summary, 2019 was an outstanding year for RingCentral. Our industry-leading product innovation is driving increased demand from customers, channel and strategic partners. Long-standing industry leaders with vast go-to-market are selecting RingCentral as their UCaaS solution for their customers. With these tailwinds, we are more confident than ever in our ability to continue to lead in this $50 billion UCaaS market.

With that, let me turn the call to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Bhavan Suri from William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [2]

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Congratulations. That was a phenomenal, phenomenal end to the year, and you've beaten revenue nicely and consistently over the many, many years I've covered you. But you absolutely crushed at the beat, both percentage and total dollars-wise, I think, is the biggest I've ever seen. I guess, maybe Mitesh, starting off with you, just drivers to just the strength of the upside in the performance here on the top line and subscription would be helpful.

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Mitesh Dhruv, RingCentral, Inc. - CFO [3]

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Thank you, Bhavan, for the kind words. The beauty of having multiple drivers in the business model is that not every driver needs to work every time. But this time, we did have strength across the board. I'll hit the hotspots on the drivers here, Bhavan, for you. So the first one is large deal momentum and new logos within that. We did have record number of over 30 deals, which are 7-figures or more this quarter, and 70% of those deals were net new logos, which actually exceeds land and expand going forward. So that's point number one.

Within -- point number two is strong upsell in the quarter. We did see very consistent upsell in the quarter. And again, over 40% of our new business came from existing customers. Third one is bookings linearity, which was a surprise to our expectations, at least, where we had a faster start to Q4 than usual Q4s. And this is despite the fact that we are going further upmarket, which may be an indication of shortening sales cycles at the margin and plus our push in the vertical side. So that's number three.

And last is channel, where we did have a very strong quarter on the channel. 70% of the deals over $1 million came from the channel. So those are 3 or 4 drivers that really led to the upside. Now going forward, we are layering on more growth dials like Avaya, like AT&T, like Atos, which will provide even further long-term durability to our growth story.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [4]

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That's really helpful, Mitesh. And one quick one for Anand on just as you think about RingCentral today, I'm obviously glad and Mitesh and team have done a really nice job moving from really small businesses to midsized businesses, enterprise. Your history is again with SAP and Microsoft with very large enterprise, as you think about sort of where RingCentral might be in -- no near term but 5 years, just I'd like to get some color on how you think about the go-to-market changes or the go-to-market layering you'll do to sort of drive even further growth within the enterprise? What do you think the setup today is -- will get you there without sort of incremental investments or changes?

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Anand Eswaran, RingCentral, Inc. - President & COO [5]

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That's a great question. So one of the key things you said is important. It's not go-to-market changes as much as layering because what we have is a great foundation. And we have people continue to accelerate the growth we create out of the mass market segments. The growth layers we expect, Mitesh walked through some of them. Our partnerships with Avaya is going to be a big contributor of growth as we look ahead and that's going to span all customer segments. We expect the same benefits to come in through the other relationships we are creating, and we talked about Atos right now.

And then the other layers, which we will start to look at even more broadly is: one, expanding on getting deeper into verticals and starting to actually create a little more density of both focus and coverage but also innovation and IP from a vertical standpoint. That's going to be key. And that will allow us to then actually go and penetrate upmarket, basically mid-market and enterprise in a much more broad, strategic manner. So partnerships and basically vertical focus is going to be some of the keys on how we look at adding layers to growth.

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Operator [6]

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Our next question is coming from Terry Tillman from SunTrust Robinson Humphrey.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [7]

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And I'll echo the congratulations. I guess maybe, Mitesh, first question for you just relates to historically, the philosophy of profitable growth. You obviously have some new growth vectors here and then layering on more investments in the existing go-to-market. But I'm just wanting to hear about the balance of these investments but also showing sales efficiencies. I'd love to get a perspective on sales efficiencies and maybe pinpointing where you might see some of that if you're going to see some of that over the next 12 months. And then I have a follow-up.

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Mitesh Dhruv, RingCentral, Inc. - CFO [8]

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Thanks, Terry. Yes, for us, it's always about disciplined investment and profitable growth, as you pointed out, to capture this large market. If you look at the go-to-market motion, there are 3 key areas of investments for us: one's the direct site, one's channels and then one is, as you call, layering up the strategic partners. So let's double-click on each one of them.

If you look at the direct side, what we are seeing is that we are able to maintain our sales and marketing efficiency year-over-year despite the fact that we are going upmarket, which is typically longer sales cycles. The reasons for that are: one is a higher percent of our reps are ramped in the segment, which lends to more productivity. And if you actually look at the highest end segment within the enterprise side, we -- our reps are producing about [15%-20%] (corrected by company after the call) more year-over-year. So those 2 vectors are playing really nicely.

Then if you look at the other 2, which is channels and strategic partners, both of these growth come at very accretive growth economics to the overall margin profile for 2020, given the lower upfront cost we have to do and lower churn. So if you add all these 3 motions together, they are actually helping our efficiency and -- as we further go upmarket, and they're actually freeing up dollars for us to invest in the future. So it's a virtuous cycle for us, Terry.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [9]

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That sounds great. And I guess, as it relates to these newer or expanded partnerships, I think you laid it out well in terms of Atos. Don't expect really much this year because of longer sales cycles. Avaya will start ramping. But let's go back to AT&T. I'd like to get an update on that in terms of just the increased emphasis by them to actually push your product. You said you've seen some early interesting activity, but I'm curious how material could this expand the relationship with AT&T be this year.

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Mitesh Dhruv, RingCentral, Inc. - CFO [10]

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Yes. For AT&T, yes, it could be a materially new driver for us. We have not dialed in much in 2020 here. It's going to be stabilizing. But in the last go-around, it was a $50 million business. So given the new expanded relationship and them choosing us to be a lead provider, this could be a broader one this time.

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Operator [11]

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Our next question is coming from Heather Bellini from Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [12]

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Great. I had a question. Vlad, just you mentioned that at the Avaya meeting, the partnership meeting last week, that you met with a number of partners and customers. And I was just wondering what feedback you've got, and if there's anything you could share with us in terms of whether it be specific industries that maybe showed the most interest or size of customers. And then I had a follow-up question on that just related to the fact that if you look at the Avaya SMB customers that are currently paying, where -- can you walk us through kind of how to think about the incentive structure for those people to move over to ACO?

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [13]

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Sure. So okay, let's do that in that order like you said. So we -- and me personally met with 3 or 4 of their topmost partners. Everyone was universally positive. Frankly, major message was, "What took you guys so long?" The field clearly wants a cloud-based pure cloud product from Avaya and here it is. There was really no pushback. One of the partners, in particular, and it's a major one, was basically saying that, "Hey, we're all in. We are not so much even interested in offering anything but ACO to the customer base." So that was great for us to hear.

I mean people have questions as to the logistics. But by and large, we're able to handle those. So I would say that there are no red lights, there are not even yellow light at this point. I mean it's just people are just waiting for the product to really be there. And most of our conversation really was, "Look, are we providing enough training? Please tell us sort of what else -- what other supporting materials you need," like that. So it's just operational to the tactical stuff, but nothing at all negative or even inquisitive on the product side or overall partnership.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [14]

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Great.

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [15]

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And -- right. Thank you. And as far as the second part of your question, what is the incentive to ACO customers, should I address that?

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [16]

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Well, yes. No, it was more -- a big question that people have is, is the product going to have its most success at first with the nonpaying customers of Avaya in the SMB channel? Or could it be that the functionality of ACO for the existing paying SMB customers is vastly better, so like they might actually be the easier ones to convert at first? I'm just trying to think through kind of that and the potential incentive for them just from a functionality standpoint.

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [17]

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Yes. I just want to be sure. No, very fair question. I want to be a little bit nuanced here. There is no such thing as a nonpaying Avaya customer, okay? When people say paying versus nonpaying, I think they mean maintenance contract or not, but even people who do not pay maintenance are very much paying customers. It's just they're not paying Avaya directly, but they're paying to a number of service providers to write up that box. And either they are paying maintenance to someone else, maybe it's a channel partner, maybe it's another maintenance organization or maybe they are just self-insuring, but to keep up a corporate PBX does take money. That stuff does not run for free even if you take initial CapEx depreciation out of the equation.

So at the high level, answer is, and we highlighted it but I'll reiterate, we highlighted when we were first introducing the partnership, our core belief is that we can come in even into a customer that is really on fully depreciated hardware and still make a business case to where they get all of the power of the cloud and our industry-leading product, which is, as you well know, has world's best, most best received voice -- business voice but also has messaging, has video, has open platform, has largest available international footprint. And they can get all of that for no more than they're paying now to even keep up the legacy technology, okay? So hopefully, that answers the question.

Now having said all of this, just as a reminder to everyone, much of the base is really covered by their partners. So it's really whomever partners find easiest to get through and we are just following the lead. And early through the anecdotal evidence seems to suggest that it just cuts across the board. It's people paying maintenance as well as those who don't. Because in the end, people want to go from legacy on-prem to the cloud so it doesn't really matter. The few dollars a month they may or may not be paying to Avaya for maintenance doesn't really matter, given the overall productivity enhancements that Ring and Avaya Cloud Office by RingCentral have to offer.

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Operator [18]

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Our next question is coming from Brian Peterson from Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [19]

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Congratulations, gentlemen, and Anand, welcome to the call. So I wanted to just go back to Vlad's comment on AT&T ramping earlier than expected. Clearly, that's been a large relationship for you in the past. I just want to be clear on what's baked into that guidance in 2020 and maybe beyond from the AT&T relationship.

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Mitesh Dhruv, RingCentral, Inc. - CFO [20]

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Yes. Thanks, Brian. Yes, Terry asked about this question as well. So what we -- financially, we saw an uptick sequentially in bookings by about 15% to 20% after AT&T made us a lead provider. So that was sort of a change in step function change we saw. Overall numbers for the bookings are still small, but given the new business growth we are seeing, the overall installed base has stabilized now, and it won't be a drag to growth as in the previous year. So it should -- overall, it should help the financial performance of RingCentral overall going forward. And we are looking forward to build upon successes with deepening the verticals and geos there in AT&T.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [21]

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Got it. And Anand, maybe just one for you. Any thoughts on how you could target some of the key verticals here at RingCentral? It'd just be useful to kind of hear how you're thinking about that playbook over the next few years.

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Anand Eswaran, RingCentral, Inc. - President & COO [22]

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Absolutely. No, it's a great question. So the way we're looking at it is, one, partnerships are a key avenue to actually targeting verticals. So that's why we've talked about the strategic partnership with Atos, and you can expect to see strategic partnerships as our key vector. And when we work with an Atos, we are working in how they work with their customers and their digital transformation journeys by vertical, and we are basically plugging our open platform across UCaaS and CCaaS into their digital workplace playbook. So the first vector of how we expect to do this is through the strategic partnerships.

The second thing we are doing is actually going at those specific verticals we want to focus on. And we are basically looking at the critical processes and workflows within these verticals to see where is it that our platform will actually be a core part of these processes customized to each vertical. So basically, that workflow/IP combination and the strategic partnerships, which we will double down on, those 2 come together to allow us to actually create meaningful vertical solutions, which connect to the customers' business and their outcomes. So that's the playbook.

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Operator [23]

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Our next question is coming from Sterling Auty from JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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So you talked about the timing of the release of the initial ACO product. Just kind of curious what your thoughts are on the initial timing of the migration tools to help customers get up onto ACO.

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Anand Eswaran, RingCentral, Inc. - President & COO [25]

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So I can take that. So the product launches on March 31. And right off the bat, we will essentially be supporting all of the Avaya endpoints. And right off the bat, we will have the automatic migration capabilities embedded into the product. So there is no lag in timing between product launch and the automatic migration capabilities to take every customer of Avaya on-prem to the cloud.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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Got you. And then one follow-up on the Atos partnership. Very familiar through the years the work that Atos has done, especially in Europe around a lot of infrastructure software, et cetera. But I'm not as familiar with their UCaaS capabilities. Is this something that they have a broad practice already or are they using RingCentral to kind of launch their presence into bringing UCaaS to their customers?

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Anand Eswaran, RingCentral, Inc. - President & COO [27]

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Yes, that's a great question actually. So what we saw as we've looked to work with Atos is they have a core -- the core of Atos's transformation is around their digital transformation practice on how they are taking their customers in their journey of transformation to be a digital business. And one of the core elements of what Atos is doubling down on there is essentially the digital workplace because at this point, every company looking to digital transform, the critical success factor of either failure of success is actually culture and how they change the way companies, both internally and externally, communicate collaborative work.

So essentially, our partnership with them is to be this foundation of their digital workplace offerings in their work with their customers' digital transformation. So that's literally where this whole thing fits in digital workplace to help Atos digitally transform their customers.

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Operator [28]

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Our next question today is coming from George Sutton from Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [29]

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I was lucky to do a demo of the ACO at the Avaya ENGAGE last week, and it was fairly clear that the collaboration tool would be your glip. It was less clear what the plans were relative to the messaging and also longer term, the contact center. So I'm curious if you could provide some clarity there.

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [30]

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Yes, Vlad here. No, I appreciate the question. Look, we are going to provide additional details on ACO at the time of general availability, which, as we indicated, is going to be later this quarter. What I can tell you is that each and every component of ACO will check all of the boxes, will be world-class and will address our customers' needs. But as to the specifics, if you can just please indulge us for a few more weeks.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [31]

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Just a quick follow-up. It looks like there was some IP acquired in the Atos deal. Can you talk about what IP that might be? And will that extend into the U.S. as well?

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [32]

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I'll start with the second part. Yes, of course, IP is IP. It's sort of international in nature. There are no limitations associated with that IP. Broadly speaking, it's in the messaging, communications and collaboration space. And it includes know-how, some code and a fairly sizable patent portfolio. But that's all -- contractually, that's all we can share at this point.

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Operator [33]

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Our next question is coming from Nikolay Beliov from Bank of America Merrill Lynch.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division - VP [34]

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My first question is for Mitesh. Mitesh, looking at the growth in the channel business, grew 63% for 2 quarters in a row, which is a pretty good performance. And the growth rate in channel seems to be tracking closer to the enterprise growth rate rather than to the mid-market growth rate. Just want to dig into this a little bit. And also, what are you guys seeing with channel economics? Where do we spend versus, let's say, a year ago?

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Mitesh Dhruv, RingCentral, Inc. - CFO [35]

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Sure, Nikolay. Yes, channel is going to -- has been a key growth driver for us. A $300 million business, as you said, growing over 60%. It is now about 35% of our total ARR, gained 5 points of share since last year. Channel, we did see record bookings in the channel this quarter. And even in the upmarket side, we saw over 70% of our total $1 million deals come from the channel. And that again dovetails into, okay, is it just growth or is it good growth economics? I think channel is a very profitable business for us. It's more profitable in dollars-wise than the direct business, given the higher lifetime value to CAC with the lower upfront investments we have to do and better churn. So I think the strategic partners going forward will add to the flywheel effect there and help us drive more profitable growth.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division - VP [36]

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And question for Vlad. Vlad, I want to circle back on the ACO migration. So our conversations with channel partners, both Avaya and RingCentral. The channel guys are really excited about the migration tool. So if you can maybe help us illustrate, okay, today, an Avaya customer is moving to RingCentral, let's say, an Avaya mid-market customer, and it maybe takes 2 to 3 weeks, whatever it is, to do the migration, the menu migration and whatnot. With ACO Version 2.0, which is going to launch in May and June, when you're going to have the migration tools, what percentage of the migration do you think is going to get automated? And by how much it's going to cut down the migration time? And clearly, that gets implications on time to revenue and competitive dynamics and all of that. Just trying to understand this a little bit better.

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Vladimir G. Shmunis, RingCentral, Inc. - Founder, Chairman & CEO [37]

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Sure. So look, so firstly, thank you for noting and understanding that the MVP that's going to go out in, like we said, later this quarter. Migration tools are really not going to be there. And we have not, as of yet, committed to a -- at least publicly, we have not disclosed any specific time frame for migration tools. I can tell you that this is very much front and center for us to get this going once the basic check boxes are done.

Look, the idea is to simplify migration, and at the high level, that means basically being able to import all the account-specific information, whether it be IVR trees, company's contacts. Potentially, we can talk about importing even voicemails that were left with on Avaya's systems, et cetera. So that's the extent. I would expect more of a gradual process, it's going to be sort of a moving train. We'll be introducing these tools over time. But certainly, we hope to cover all of the migration cases eventually. So I would say, over time, to the extent possible, at 100%, just with the caveat that Avaya has multiple user bases internally. And for example, some of the Moto customers, it may be hard to get the data out just because of the generation of that technology. But for IP Office, where there is more modern software involved, we expect to be able to get to the data and to be able to import it into ACO.

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Operator [38]

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Our next question is coming from Meta Marshall from Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [39]

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First question, just on the Atos relationship. Any additional investment needed by you guys to launch? Or will they, on those kind of co-branded product, will they be fronting that investment? And then maybe a second question on the contact center business. Just saying that your kind of attach rates are increasing there, just any color as to whether those are still primarily kind of in contact implementations or whether you're seeing uptick of the kind of Dimelo Connect First homegrown products?

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Mitesh Dhruv, RingCentral, Inc. - CFO [40]

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Sure, Meta. It's Mitesh, I'll take both. The first one on Atos, yes, of course, there's investment required to get this up and running. It's all contemplated in the guidance so our guidance would have been up even more if there were not these investments. But that said, we do -- given the go-to-market motion there, we do think that this relationship is going to be accretive right from the get-go. And that's part 1.

Part 2, on the contact center, right now, predominantly, it is our inContact business, although we are seeing some green shoots with the Dimelo. Anand did call out this Swiss brand with Montblanc. I love those pens, by the way. So -- yes, so we are seeing green shoots there but early days for that.

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Operator [41]

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(Operator Instructions) Our next question is coming from Michael Turrin from Wells Fargo.

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Michael James Turrin, Wells Fargo Securities, LLC, Research Division - Senior Analyst [42]

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Mitesh, we've seen a bias in UCaaS towards customers paying on a monthly basis. Just wondering if you could provide some color around your expectations, given that backdrop for the shape and variability of deferred revenue in the model here.

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Mitesh Dhruv, RingCentral, Inc. - CFO [43]

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Yes, sure. Thanks, Michael, and welcome to rejoin RingCentral earnings calls. So thank you for again making a coverage here. So in terms of deferred revenue, yes, deferred revenue is a function of more the payment the customers have and not quite a function of the length of their contract. So on the prepayment, what we are seeing here is 2 trends. We are seeing a normalization of our customers paying us on annual prepays, which is actually helping us give less discounts upfront. That's one. And products like contact center are typically built in early years so that actually has an impact on deferred revenue.

But on the length of the contracts, customers are signing up for multi-year contracts with RingCentral, given the more comfort level they have with us. And so if you were to take a duration impact from this overall equation, I think ARR abstracts this noise and it levels the playing field in terms of forward-looking indicators. So I think for our business, and quite frankly, businesses which have more bias towards monthly payments, I think I would steer our investors to look at ARR growth.

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Operator [44]

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Our next question today is coming from Nandan Amladi from Guggenheim Partners.

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Nandan Girish Amladi, Guggenheim Securities, LLC - Director of Technology, Media & Telecom equity research practice [45]

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So now that you've passed the $1 billion run rate a year ahead of schedule, have you thought about updating your long-term model?

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Mitesh Dhruv, RingCentral, Inc. - CFO [46]

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Sure, Nandan. We have thought about it. We -- first of all, thank you for noticing that. Yes, we did clear this $1 billion hurdle ahead of schedule. And the goal is again to look -- keep on layering on more investments in both product and go-to-market. To put a new long-term target out, it makes sense for us to gauge how all these initiatives are panning out, be it AT&T, be it Avaya, be it Atos and then provide a very thoughtful, long-term model over time.

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Operator [47]

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Our next question today is coming from Will Power from Robert W. Baird.

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William Verity Power, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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Okay, great. I guess I just want to come back to Atos. It sounds like this could be the first and maybe some additional strategic opportunities. So I guess I wonder, A, how many more deals like this potentially out there are there, either in Europe or the U.S.? How should we think about that? And as part of that, is there any way to kind of help us frame how to think about the ultimate size of this? I know you're not expecting much revenue contribution this year, but is this something that you'd expect to contribute maybe $50 million of revenue a few years out? Could it be somewhat similar to AT&T over time? How do we kind of think about that?

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Mitesh Dhruv, RingCentral, Inc. - CFO [49]

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Yes. Well, I think it's -- again, look, we just inked the deal last quarter so early days. But if you look at the overall potential, Atos is a #1 digital transformation player in Europe with deep transformation projects across the board. And I think there's an opportunity for us to have a place where communication becomes a hub with all these major cloud transformation projects they have, A. Part B, they also work with G Suite, Microsoft, ServiceNow, Salesforce, all of these which are key integrations for us. So there is a real avenue where we are dragged along with this end-to-end projects. Now in terms of what revenue opportunities there could be, it could be meaningful. But again, it's very hard to tell at this stage, given we just inked the deal. So stay tuned.

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Operator [50]

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Our next question is coming from Samad Samana from Jefferies.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [51]

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So Mitesh, just for clarity, the 25% to 26% growth outlook for 2020, does that include the Avaya ramp later in the year that you mentioned? And then maybe just international, how did performance go there? We haven't heard much about that. And maybe just how large deals performance was outside of the U.S. Congrats on an awesome quarter.

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Mitesh Dhruv, RingCentral, Inc. - CFO [52]

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Samad, you were supposed to ask 1 question. You jammed in 4 but it's okay. So first of all, on the guidance, it does assume some minimal contribution from Avaya in the guidance but not material, at least because we're getting started. That's part one. In your -- what's the second part of the question? Internationally, you said?

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [53]

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In the fourth quarter, how you did there?

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Mitesh Dhruv, RingCentral, Inc. - CFO [54]

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Yes. So international, yes, we saw -- international is about, call it, 10-ish percent of our revenue, and it is growing very nicely above the overall growth of the business. We feel that Atos and Avaya will be vectors for amping up the international growth for us going forward as both of these companies have significant international presence.

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Operator [55]

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Our next question is coming from Rich Valera from Needham.

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Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [56]

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Let me add my congratulations on a nice finish to the year, gentlemen. Follow-up on the contact center discussion before. Clearly, you've had great success in selling a tightly integrated contact center with your UC product. Just want to think how you're thinking about ACO. You're going to have essentially a UC product, UC cloud product. Avaya's going to have a use -- or a cloud contact center product presumably by the third quarter of this year. So how do you think about sort of the long-term trajectory of ACO with a cloud contact center and how critical that is to making this ultimately successful?

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Anand Eswaran, RingCentral, Inc. - President & COO [57]

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Yes, that's a good question. So what I would say is it's always beneficial for RingCentral when customers decide to move different applications, and especially in the case of contact center, to the cloud. We'll be able to better gauge at least as it relates to Avaya's CCaaS product. We'll be probably able to better gauge the impact of that once it is on the market. It's hard to actually say anything to it right now.

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Operator [58]

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Our next question is coming from James Fish from Piper Sandler.

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James Edward Fish, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [59]

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You've done a fantastic quarter and end of the year, and congrats Anand on the new role here. Just I'll squeeze one in for you. Can you just walk us through exactly what sales and marketing changes were made to make the Avaya partnership ready to go already? And I guess, any sense to how channel partners can get compensated compared to the traditional go-to-market?

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Mitesh Dhruv, RingCentral, Inc. - CFO [60]

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Sure. In terms of the -- can you repeat the second part of the question again? It didn't come through.

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James Edward Fish, Piper Sandler & Co., Research Division - VP & Senior Research Analyst [61]

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Just trying to understand how the channel partners are going to be compensated compared to your traditional approach.

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Mitesh Dhruv, RingCentral, Inc. - CFO [62]

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Sure. So on the second one, there's going to be no difference in the channel compensation. They are going to be compensated the way they have been getting compensated. In terms of our go-to-market changes, it's more train the trainer model, where we have our product and our overlay team, the channel overlay team, that channel overlay team will be responsible or have been training the A, the Avaya salespeople and the Avaya channel. So that's the motion, where we have been -- we will be able to leverage their vast go-to-market capabilities.

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Operator [63]

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Our next question is coming from Mike Latimore from Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [64]

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How did average revenue per unified communications seat end up in sort of fiscal '19 versus '18? Was it flat, up, down a little bit?

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Mitesh Dhruv, RingCentral, Inc. - CFO [65]

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Yes, sure. So ARPU has been staying very consistent, Mike. No discernible changes.

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Operator [66]

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Our next question is coming from Andrew King from Dougherty & Company.

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Andrew King, Dougherty & Company LLC, Research Division - Research Analyst [67]

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Andrew King on for Catharine Trebnick. So on Avaya's earnings call this morning, they mentioned that originally, ACO would only be released in the U.S. I wanted to get a little bit more color into what the next region that they'd be launching into and what that time line would look like.

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Mitesh Dhruv, RingCentral, Inc. - CFO [68]

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Sure, Andrew. So for this year, there's a plan to roll out U.S. initially and a couple of countries internationally, which I would say if you net it all out, we'd be able to cover at least 60% to 70% of all the geo regions where the Avaya's presence is with the ACO product.

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Operator [69]

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We've reached end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.