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Edited Transcript of RNG earnings conference call or presentation 6-Aug-18 9:00pm GMT

Q2 2018 RingCentral Inc Earnings Call

San Mateo Aug 19, 2018 (Thomson StreetEvents) -- Edited Transcript of RingCentral Inc earnings conference call or presentation Monday, August 6, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David D. Sipes

RingCentral, Inc. - COO

* Mitesh Dhruv

RingCentral, Inc. - CFO

* Paul B. Thomas

RingCentral, Inc. - Senior Director of IR

* Vladimir G. Shmunis

RingCentral, Inc. - Co-Founder, Chairman & CEO

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Conference Call Participants

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* 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

* Charles Erlikh

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

* George Frederick Sutton

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

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity Analyst

* Mark Frank Grant

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Matthew David Van Vliet

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Michael James Latimore

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

* Nikolay Ivanov Beliov

BofA Merrill Lynch, Research Division - VP

* Sterling Auty

JP Morgan Chase & Co, Research Division - Senior Analyst

* Terrell Frederick Tillman

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

* Yuuji P. Anderson

Morgan Stanley, Research Division - Research Associate

* Zack Turcotte

Dougherty & Company LLC, Research Division - Anlayst

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Presentation

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Operator [1]

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Greetings, and welcome to RingCentral Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Paul Thomas, Senior Director of Investor Relations. Please go ahead.

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Paul B. Thomas, RingCentral, Inc. - Senior Director of IR [2]

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Thank you. Good afternoon, and welcome to RingCentral's Second Quarter 2018 Earnings Conference Call. I am Paul Thomas, RingCentral's Senior Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Dave Sipes, Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Dave 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 non-GAAP to 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.

In addition, we'd like to invite you to tune in on Wednesday, September 5, when we will be celebrating the fifth anniversary of RingCentral's IPO by ringing the closing bell at the New York Stock Exchange.

With that, let me turn the call over to Vlad.

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

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Good afternoon, and thank you for joining our second quarter earnings conference call. As Paul mentioned, today, we are celebrating our 20th quarterly report as a public company. We are proud of our unbroken record of meeting and exceeding investors' expectations for this entire stretch.

Q2 was no exception. We had an outstanding quarter. This was led by continuing strength in our mid-market and enterprise business and momentum with our general partners. I'll begin by covering some of the key highlights of the quarter.

First, total revenues for the second quarter grew to $161 million. This is a 34% increase year-over-year, up from 30% in the year-ago quarter. This was above the high end of our guidance range. Second, our core subscription business, excluding AT&T, continued its strong performance. Core subscription revenue grew 37% year-over-year, up from 32% in the same quarter last year. Third, mid-market and enterprise business showed excellent results. We define mid-market and enterprise as 50 seats or greater. This grew 80% year-over-year and is now a $237 million business. Our enterprise business, defined as customers with $100,000 or more in annual recurrent revenue, or ARR, grew over 110% year-over-year. It is now over $120 million. Fourth, we saw strong performance in Europe. We won a number of large deals in the U.K. and France. We are pleased with the momentum we are seeing in the region. Finally, our channel partners continue to deliver impressive growth. This quarter, our channel business grew over 100% year-over-year to $139 million. We're seeing more of our partners choose to lead with RingCentral solutions.

Cloud is winning, and RingCentral is winning in the cloud. Cloud is winning because legacy phone systems, designed for fixed locations and supporting voice-only communications, no longer meet needs of modern mobile and distributed workforces. RingCentral, in our view, is winning in the cloud because of our relentless focus on form innovation. This investment drives new, well-differentiated capabilities that bolster our industry leadership.

Our investment in innovation resonates with our customers. Customers choose RingCentral as much more than legacy landline voice replacement. We shared data at our recent Investor Day on our platform capabilities that influence the purchasing decision of our top 15 customers. Mobility, team messaging, video, contact center and open platform were all critical considerations. This is the most important aspect of our strategy. Our industry-leading cloud communication solutions allow businesses to completely reimagine their internal and external communication and workflows.

And numbers speak for themselves. While voice usage grew a healthy 40% year-over-year in 2017, the other modes of communications like team messaging, video and third-party API calls all grew at over 100% year-over-year. This quarter, the story continued. Our largest wins in the quarter were again influenced by customers wanting an integrated solution that offers mobility, team messaging, video, contact center, open platform and more. Our Chief Operating Officer, Dave Sipes, will add more color to this and some of my other preceding comments.

Our technology leadership and differentiation is being similarly recognized by leading industry analysts and associations. As we mentioned in our press release, we won several awards recently. These include recognition of Glip as a team messaging industry leader because of its mobile source design, best-in-class user experience and ability to serve as a digital communications hub to increase workforce productivity; as well as recognition of our open platform for technical innovation, adoption and reception by the developer community.

We are continuing to invest and widen the moat between us and the rest of the field. With a growing lead in the cloud communications industry and the large, underpenetrated market opportunity ahead, RingCentral is well positioned to achieve our goal of exceeding $1 billion in revenue in 2020.

Now for some color, I will turn the call over to our Chief Operating Officer, Dave Sipes.

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David D. Sipes, RingCentral, Inc. - COO [4]

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Thank you, Vlad. We're pleased with the results of the quarter and the momentum we saw in our mid-market and enterprise business. Our sales growth is being fueled by our growing scale as well as our expertise and maturity across all of our sales channels.

In our enterprise segment, we continue to densify across the major metros or NFL cities, and we are expanding internationally. Additionally, our enterprise segment efficiencies are improving even as we are scaling the team. Mitesh will go into more detail on that point later.

Earlier, Vlad mentioned the numerous reasons customers choose RingCentral. Let me walk through just a few customer win examples from our second quarter. I'll highlight the critical capabilities that helped secure these wins like ease of deployment, integrated contact center, video, mobility, global reach and team messaging.

As we continue penetration of enterprise accounts, well-known reference bull customers are key. For example, last year, we announced a win with ExtraSpace Storage, the second-largest operator of self-storage properties in the U.S. Subsequently, this quarter, we won Public Storage, the world's largest owner and operator of self-storage facilities and a Global 2000 business. Public Storage was using a legacy system that was struggling to meet the needs of their modern-day workforce, and they were facing significant reliability issues with that system. Public Storage chose RingCentral because of its recognized industry leadership, strong channel relationships and proven capability to professionally deploy across thousands of locations. Public Storage has more than 2,300 U.S. locations across 38 states. The legacy system they were using had taken 12 months to deploy across all of their locations. Now compare that to the RingCentral deployment. Using a combination of RingCentral capabilities and a key channel partner, we deployed across all of their 2,300 locations in just 2.5 weeks.

Another example of an enterprise win was in health care, where we were selected by One Medical, a leader in technology-enabled primary care. One Medical chose RingCentral for its integrated multimodal communications, contact center capabilities and our open platform. With our open platform APIs, One Medical plans to integrate our communication platform directly with their electronic medical record system. When fully deployed, One Medical will have a combined 1,400 seats of RingCentral Office and contact center.

In education, we won a significant deal with Southern New Hampshire University. They chose RingCentral because of our video meetings and our powerful administrative capabilities. When fully deployed, they will have over 2,500 seats of RingCentral Office.

As Vlad mentioned, we had a strong quarter in Europe. For example, this quarter, we won our first 1 million-plus total contract value deal in France, CIRCOM, a professional association of public service television in Europe. They chose RingCentral for our global and mobile capabilities and our ability to deploy rapidly. CIRCOM will have over 2,000 seats of RingCentral Office when fully deployed.

In the U.K., we won an important deal with Luxfer Holdings, a globally, highly engineered advanced materials company. Luxfer selected RingCentral because of our global reach, unified platform and professional service capabilities. Luxfer plans to deploy over 900 seats in the U.S., U.K. and the Czech Republic.

Our channel partners contribute significantly to our success in these large opportunities. This is a result of our investment in the channel across the globe. For example, of the 6 wins I just mentioned, 5 were won with channel partners.

Now I'll cover some of our land-and-expand deals in the quarter. First up, Internet Brands, a leader in online advertising and e-commerce websites, has been a longtime customer of RingCentral. Internet Brands had over 1,600 seats combined of RingCentral Office and RingCentral Contact Center and had broadly deployed our Glip team messaging. This quarter, they signed an expansion agreement to increase the deployment to 3,600 seats.

Another example is Brinker International, owners of Chili's and Maggiano's restaurants. Brinker originally deployed RingCentral Office across their restaurant locations. This quarter, they expanded their deployment by adding RingCentral Office and RingCentral Contact Center to their headquarters location. Brinker now has over 6,000 seats deployed on RingCentral.

Hand-in-hand with our outstanding sales performance goes our unwavering commitment to customer success. This underpinned our strong retention and upsell results, as will be further shared by Mitesh.

In summary, we had an impressive quarter with significant new wins and expansion from existing customers, both domestically and internationally. Our enterprise penetration continues at a rapid pace, and it is supported with strong weighted pipeline growth that has more than doubled year-over-year, along with our growing enterprise sales team. We are committed to innovation and customer success, and we believe that we're well positioned to win the substantial market opportunity in front of us.

Finally, excitement is building for our third annual user conference show, ConnectCentral, that will be held in San Francisco on November 12 through 14. I hope you will join us there.

Now for some color on 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, Dave, and good afternoon, everyone. Before I begin discussing RingCentral's results, I'd like to ask you to refer to the slide deck posted on our IR website. This provides the key points of our call today as well as supplemental information. We adopted ASC 606 as of Jan 1, 2018, under the full retrospective method. We have provided comparative numbers for the respective periods of 2017 in the slide deck and press release.

Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings press release and in the slide deck.

With that, let's move on to the results. We had a great second quarter. Once again, all our key financial metrics beat the high end of our guidance. This was led by our mid-market and enterprise business, supported by our strong performance with channel partners.

In the second quarter, our subscription revenue grew 32% year-over-year to $146 million, up from 29% a year ago. Normalizing for AT&T, our core subscription revenue grew 37%, up from 32% a year ago. Total ARR grew to $630 million, up 32% year-over-year; and ARR for RingCentral Office grew to $548 million, up 37% year-over-year. Our performance, again, was led by robust growth in mid-market and enterprise business. It was up 80% year-over-year, with ARR of over $235 million. Our enterprise business of over $120 million, growing in triple digits, represented over half this business.

Channel partners once again continued their rapid expansion this quarter. ARR from our channel partner business was over $135 million and grew more than 100% year-over-year.

Overall, our second quarter top line growth dynamics was strong, but this is only half the story. At our Investor Day in June, we articulated our philosophy of profitable growth. To grow efficiently, we focused on a few core elements of the SaaS model. These were onetime metrics to give investors a deeper appreciation of our business. We would like to recap these one more time with our Q2 performance to reinforce the elements of the model.

Let me start with growth economics and its 2 key elements. The first is the cost of acquiring a customer or cost-to-book, and the second is net retention, which includes upsell to existing customers. In Q2, both of these SaaS key metrics trended up year-over-year.

First, our mid-market and enterprise business cost-to-book continued to improve. An increasing number of enterprise reps are becoming more experienced, and the productivity of our experienced reps is improving. Second, our mid-market and enterprise net retention improved nicely year-over-year. These improving economics enable us to invest more in growth while expanding the bottom line. This drives a virtuous cycle of profitable growth.

Moving on to our Q2 financials. The second quarter was strong across revenue and margins. Total revenue increased 34% to $161 million. Subscription gross margin was 82.6%, up 120 basis points year-over-year. Operating margin was 8.8%, up 180 basis points year-over-year, resulting from our strong top line and leverage in our cost of goods sold and G&A. We ended the quarter with $567 million in cash, an increase of $12 million from Q1.

Now let's turn to our outlook. We are raising our 2018 guidance. We expect subscription revenue to be between $595 million and $600 million for an annual growth of 28% to 29%. Excluding the impact of AT&T, we expect core subscription revenue to grow 34% to 35%. The relative impact of AT&T on our overall growth will begin to abate in 2019 as our revenue base increases and AT&T comparisons normalize. We expect total revenue of between $649 million and $656 million for an annual growth of 29% to 30%. We expect non-GAAP operating margins of 8.2% to 8.4%. This is consistent with our objective of delivering 75 to 100 basis points of expansion annually. We expect non-GAAP EPS of $0.66 to $0.70 based on 86 million fully diluted shares. The difference between GAAP and non-GAAP EPS is expected to include the following: $0.81 of stock-based compensation, $0.19 of amortization of debt discount relating to our convert and $0.06 of amortization of acquired intangibles. We do not forecast any effects of currency remeasurement, which could be a significant reconciling item between GAAP and non-GAAP EPS, because it is difficult to predict and subject to constant change.

Now for our third quarter guidance. In the third quarter, we expect subscription revenue to be between $152 million and $154 million for an annual growth of 27% to 28%. We expect our core subscription revenue to grow 33% to 34%. We expect total revenue between $165 million and $168 million for an annual growth of 27% to 29%, and we expect non-GAAP operating margin of 8% to 8.2%. We expect non-GAAP EPS of $0.15 to $0.17 based on 86 million fully diluted shares. The difference between GAAP and non-GAAP EPS is expected to include the following: $0.22 of stock-based compensation, $0.06 of amortization of debt discount and $0.02 of amortization of acquired intangibles. Again, we do not forecast any effects of currency remeasurement. All our guidance details are available in our press release and our earnings deck.

In summary, we are pleased with the performance of our business in terms of both our growth rate and underlying economics to deliver that growth. To reiterate our message from our Analyst Day, given the size of the opportunity ahead of us, our bias is toward growth. With compelling growth economics, we are confident of also delivering operating margin expansion. Within that context, the rule of 40, which is a sum of total revenue growth and operating margin, is a high bar that we have set our sights on. In fact, we are tracking above 40% so far this year and are confident to exceed this target while also exceeding $1 billion in revenue in 2020.

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 comes from the line of Bhavan Suri with 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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I just wanted to just first touch -- maybe Mitesh can jump in here. You guys have had a great -- you've done a great job sort of moving up the enterprise. You talked about sort of becoming much more not just mid-market but enterprise-based business. I guess, a little more just what drove that. And Mitesh, any metrics? I know you provided some, but maybe some metrics, maybe even potentially more financial color on the enterprise performance, that would be really, really helpful.

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

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Sure, Bhavan. So yes, the enterprise business was -- they performed really solid this quarter. It was north of $120 million business, growing triple digits. And now it represents half of our overall mid-market and enterprise business. So pretty solid performance. I'll say 3 or 4 things come to mind in terms of the color you asked, and number one is the enterprise market is in a very, very different phase now than it was a year ago. And all these enterprises are asking to see a UCaaS solution to be at least in the mix while they're evaluating their next phase of solutions. And especially, that's coming to the channel. So that's point one. So that's -- the demand is there. It's in pull mode now. Second is not a core metric, and we've not given a key -- this metric in a couple of quarters, but our million-dollar TCVs we signed this quarter were a record. So as you know, in Q4, we signed 15 deals, which was seasonally strong. And this quarter, it surpassed even that metric. And we actually did sign our largest TCV deal in the history of RingCentral. So that gives you some color. Within the TCV deals, about 70% of those new deals over 1 million TCV were new logos. So totally new business. So that's point number two. Point number three, I'd say, is the productivity itself. We are seeing our experienced reps being more productive. Their quotas are going up. They are booking more, and overall channel itself is more ramped. So for us, it's just not about growth at all costs. It's profitable growth. And that's how we can sustain a long-term operating model for the company. And lastly, as Vlad mentioned, that we have multiple on-ramps into communications and its indicative product, which is actually helping our deals as customers are looking to deploy a unified suite across the board. So you look net-net, I think, we are in early phases here, and these are the 4 factors that led to a strong performance there.

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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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(inaudible) set of metrics there. Maybe one for you, David. You called out sort of, in the last quarter, just having one of the strongest quarters for upsell in the existing base. Your last point sort of touched on it a little bit, the net dollar expansion rate or retention rate, so to speak. But as you see that trend and you look at the continuation of upsell as more customers are sort of saying, let's simplify the IT stack, reduce the number of disparate solutions, when you look at sort of the upside you delivered, sort of the strength in the quarter, any sense of how much of that was sort of like upsell driven of this like, hey, I started one department and expanded vis-a-vis I have net new product and net new customer?

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David D. Sipes, RingCentral, Inc. - COO [5]

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We see the upsell coming strongly both from addition of new seats and expansion across an organization. Sometimes, we'll start in U.S. locations and expand out internationally across their other divisions. We've also seen in places like -- where we've done retail locations and then come back with a headquarter location. And then you see, additionally, expansion across the product suite with Brinker, for example, adding contact center into the mix. And so it's across multiple dimensions that we're seeing the upsell affect the business. And as we get into the larger enterprise, it just creates more opportunity as we initially get in with a certain division or product and then expand across that organization.

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Operator [6]

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Our next question comes from the line of Nikolay Beliov with Bank of America.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division - VP [7]

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Mitesh, in your prepared remarks, you were talking about onetime metrics provided at the Analyst Day. One of those seems to be net new bookings growth, which accelerated -- has accelerated nicely and was very strong exiting, I guess, 1Q. Can you please provide us some color at least on the quarter in terms of bookings trend qualitatively and how those bookings are going to translate into future revenues?

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

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Sure, Nikolay. So yes, we did provide this net new bookings at the Analyst Day as onetime metrics to give investors an appreciation of our underlying business drivers. And it's important to note that -- to look at these metrics not on a quarterly basis but over a longer period of time because as we move toward the enterprise segment, the bookings are lumpy. They are volatile. There's linearity. And that basically causes a lumpiness in our revenue, rev rec, the timing of rev rec, a deployment cycle. And so it's important to look at it on a more sustained basis. That said, to answer your question, we did have a very, very strong bookings quarter this quarter, and you can actually see the results of that manifest itself in our core revenue, subscription revenue, of about 37%, which was up from a year ago of 32%. So we did see acceleration in that. And if you -- I would point you to -- if you are looking at the long-term driver or long-term metrics for the business, I'd point you to the most sustainable or steady metric, which is the be-all, end-all, which is ARR. Our Office ARR did grow at 37% this quarter, steady from last quarter. And Office represents mostly almost 90% of the business. So I think, overall, I think, we are very pleased with the business. And you saw the bookings translate to ARR, which led to about 37% growth this time for Office.

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Nikolay Ivanov Beliov, BofA Merrill Lynch, Research Division - VP [9]

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And as a follow-up, in that context, as you guys go upmarket, what trend are you seeing in average revenue, ARPU, per user?

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

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Sure, Nikolay. So we are seeing our ARPU hold steady in all segments. And despite there's some noise out there that there's price compression and people are giving away deals, we are not seeing that. Our ARPU is holding steady, and that basically is a phenomenon of the fact that we are able to provide a lot of differentiation to the customers and provide different integration points with our overall platform. So we are not seeing that yet. So our ARPU is holding steady.

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Operator [11]

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Our next question comes from the line of George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [12]

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I was encouraged that you called out Europe specifically with some attractive wins. And it seems to me that's a little more embryonic in terms of an opportunity. Can you talk about your go-to-market strategy, both direct and channel in Europe?

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David D. Sipes, RingCentral, Inc. - COO [13]

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Sure. We continue to -- this is Dave Sipes. We continue to invest aggressively into the U.K. and across Europe now and into France. We -- the -- Europe has brought -- over the last 4 quarters, has brought multiple million-dollar TCV deals. So we've had some consistency and growth in that. We saw the win with CIRCOM in France and Luxfer in the U.K. this quarter. And we've expanded our enterprise teams across the region to capitalize on that.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [14]

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One of the things you didn't call out as a differentiator this -- in some of these deals was video. And I'm curious with your Zoom relationship, if we kind of think forward 3 to 4 quarters when 5G starts to become more prominent, would -- should we start to hear about that as more of a differentiator?

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

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Yes. This is Vlad. Yes. Very interesting question. Look, we'll have to see. I mean, it's a multipart question here. So as you know, Zoom's becoming very strong and definitely an emerging leader in video and web conferencing. They do particularly differentiate in, call it, lower-bandwidth environments, which anything but Wi-Fi. So we'd see probably even better performance out of Zoom once 5G becomes more prevalent. So we think we're in a good spot there, definitely helping us win accounts.

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Operator [16]

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Our next question comes from the line of Terry Tillman with SunTrust.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [17]

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Yes. 2 questions. First question is, Mitesh, I appreciate your commentary on profitable growth. But the last couple of quarters, the level of upside has been more notable. In fact, this quarter, I think it was record upside if I just look at dollar value of upside. Is there anything that's changing in terms of your kind of interest in operating leverage or a balance of operating leverage versus investing for growth? Just trying to understand what's been more notable upside dynamics lately.

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Mitesh Dhruv, RingCentral, Inc. - CFO [18]

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Sure, Terry. So it was a very strong quarter across the board. And last 2 quarters, all of the chips have been falling our way. So that has been a trend there, which we are seeing. Now we are moving into the enterprise segment and mid-market, so it can be lumpy from quarter-to-quarter. So keep the expectations low. Don't just keep on extrapolating this beat. But on a more serious note, in terms of profitable growth, we are seeing a couple of key trends for all of the key SaaS metrics, which is our cost-to-book is coming down in the mid-market and enterprise segment. Customers are staying longer, which is -- which you can see in a lower growth churn, and customers are buying more. Our upsell as a percentage of new bookings was about -- more than 40% again. We didn't say it in the call, but it was more than 40%. So given these growth economics and growth dynamics, the bias would be, Terry, to invest in GTM and innovation and double down there. Quite frankly, we were not able to deploy all the money we would have liked to this quarter in a thoughtful manner. So I think the bent going forward is to be biased towards growth. That said, we would -- we will show operating margin expansion the way we have discussed of about 75 to 100 basis points annually. So that remains sacred for us. But that said, given the economics of what we are seeing, we are going to be just going -- turning on all spigots here.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [19]

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Okay. All right. And my follow-up question just relates to the platform innovations that you've put in place in the past and the richness of the API platform. What I'm curious about is, where are we in uptake? Any kind of statistics on average number of integrations? And do you see anything in terms of higher net retention from customers that are more fully leveraged in platform for integrated workflows?

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Vladimir G. Shmunis, RingCentral, Inc. - Co-Founder, Chairman & CEO [20]

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Yes. Thank you. Vlad here. I'll start with the second part of the question as far as better net retention. So the platform is used primarily by enterprise customers, and we have pretty much a perfect record there anyways. It's a little bit hard to improve on that, frankly. It is a bit of a two-way street, obviously. These customers do choose us because of the platform, which is fully differentiated. As you know, we are the only scaled-up provider with an app gallery. I think we've been forthcoming with the information that we have many hundreds of apps, well over 10,000 developers. So a little bit of a self-selective, but yes, in any case, we are not seeing gross churn in the enterprise segment as is, and certainly none of the platform customers. Sorry, the first part of the question is on sort of what level of penetration. I think what we shared is that out of the top 15 accounts, we are seeing platform use, as measured by number of API calls, growing in triple digits as opposed to our voice use, which is growing around 40% year-over-year. So definitely, major out-pacement on the platform side.

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Operator [21]

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Our next question comes from the line with John DiFucci with Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [22]

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I like the comments here, guys. It's nice to see this, especially for such a long time, and it's almost like it's consistent. So that's really hard to do. I think I have a couple of questions, and I think Dave might be the person to answer these or maybe Vlad would join in or even Mitesh. Dave, I think you said the pipeline more than doubled year-over-year. I guess, I'm just curious, we can just be thinking, okay, pipeline is doubling. Things are doubling. But are there any changes you can share with us to the characteristics of that pipeline? The sales cycle, I would think, has been elongated because you're moving into larger customers, the deal size, close rates. Anything that you can share beyond that one metric that it's doubled?

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David D. Sipes, RingCentral, Inc. - COO [23]

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Yes. The -- we talked about the enterprise, and we're penetrating that market. It's now starting to calm and, as Vlad mentioned, require UCaaS, as Mitesh mentioned earlier. The sales cycles, I think, still too early to call to say if they're accelerating, but we have had a number of deals where they've come in, and they've selected us on a much more urgent basis as we felt credibility in the space, and we have the scale and coverage to -- so you saw some of that, like Public Storage was one of those this quarter, but it's one of several. However, on -- if I had to be conservative, I'd say sell side was still about 6 to 9 months on the enterprise side. And we're seeing kind of normal behavior there, but an expansion of the market as more customers are looking to select UCaaS.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [24]

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Okay. Okay. Great. And I guess, I'm just curious. I think Mitesh said that an increasing number of enterprise reps are contributing meaningfully. And I think you said at your last Analyst Day back in June that less than half of your dedicated enterprise sales reps were fully ramped. I was wondering if you can -- since you've sort of indicated -- indicating better, could you give us any update on that, where you believe that is right now and even maybe for comparison a year ago so we can sort of think about that?

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Mitesh Dhruv, RingCentral, Inc. - CFO [25]

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Sure, John. So it's been only 2 months since the Analyst Day, less than 2 months. So not much has changed since then in the last 2 months. It's still trending about the same. But I will give you another data point, which is if you look at the growth rate in the enterprise sales reps we have, that clip of growth is much slower than our overall ARR growth rate you saw in the enterprise. So that sort of gives you a sense of productivity there.

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Operator [26]

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Our next question comes from the line of Matt Van Vliet with Stifel.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [27]

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I guess I wanted to dig in a little bit more on the success and growth of the channel overall. And maybe if you could help us just understand how much of that is bringing new partners into the fold versus having continued success with existing partners, really investing more around the RingCentral Office here and then maybe just continued expansion deals from channel partners.

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David D. Sipes, RingCentral, Inc. - COO [28]

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Yes. This is Dave Sipes. The -- we're having -- obviously, the channel's growing at over 100% again in the quarter. So it's been a fabulous performance by the team. We bring in hundreds of new partners every quarter. We had a record quarter in that this quarter. And we continue to penetrate some of our largest partners through education of their organizations and their sales representatives as well as building our reputation. We're finding the partners are selecting us because of the quality of our product and our ability to professionally deploy through professional services implementation and customer support. And I think that's creating a snowball effect of why customers are coming, why these partners are coming to us.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [29]

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And then looking at your overall trend, and pruning on the cost-to-book. Is that being influenced as well by the channel partners? Or is that really just a factor of the continuing improvement on the sales efficiency side?

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Mitesh Dhruv, RingCentral, Inc. - CFO [30]

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Yes. Both factors lead to the cost-to-book. The channel is a lower cost-to-book because you don't really have to spend the marketing dollars to acquire these customers. So it's a hotbed of leads we get. And the second part, again, is our cost-to-book is coming down because of the efficiencies we are seeing in the direct sales force side being more productive.

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Operator [31]

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Our next question comes from the line of Heather Bellini with Goldman Sachs.

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Mark Frank Grant, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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This is Mark Grant on for Heather. Just on competition. We saw some consolidation announced recently in the collaboration space. You clearly had some nice wins in the quarter. But can you just give us an update on what you're seeing generally in the competitive landscape and what you think the impacts might be going forward as the competitive space continues to evolve?

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David D. Sipes, RingCentral, Inc. - COO [33]

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Yes. So I mean, I think, a couple of things there. In the UCaaS space, we continue to have a market-leading competitive position. We haven't seen significant changes in the competitive environment within UCaaS, and we have consistently high win rates, and that continued in the quarter. And the legacy vendors have been talking about cloud, but still are selling legacy services. A little bit of the consolidation you mentioned may be referring to the team messaging space, pure-play space. Some people are trying to bulk up and compete with Microsoft teams, where we've taken a different approach and combining business communications with team messaging as well as video and contact center, and we believe that's a winning combination in the market. And we don't see that consolidation as impacting the landscape in UCaaS.

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Operator [34]

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Our next question comes from the line of Brian Peterson with Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [35]

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So Mitesh, maybe one for you. You hit on the upmarket a bit. You mentioned that the net revenue retention improved. Any color you can add on that, in some of the factors driving that improvement?

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Mitesh Dhruv, RingCentral, Inc. - CFO [36]

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Sure, Brian. So this upmarket net retention metric, we don't give it out every quarter. It's meant to be an annual metric. But since you've asked, it is -- it was, again, stable over 130% again this quarter. And in terms of the drivers for that, I mean, look, there are 3 drivers, I feel. Number one is the shift to upmarket in the customer mix, which provides a natural tailwind to our churn rate, the gross churn rate, because of lower business mortality, and the barriers to exit for these customers is higher. That's number one. Second is the upsell and land-and-expand. As Dave and Vlad were mentioning in their remarks, we don't really do a wall-to-wall deployment initially. So we gave an example of Internet Brands this quarter, where it went from about 1,000 users to about 3,000 users. So you can see how that plays out for net retention. And the third one really is sort of -- which is evolving, is the cross-sell bucket, where we are selling more products into the installed base. Brinker, which is the owner of Maggiano's Italian food and Chili's, we saw that, where this quarter, we are deploying a contact center solution for them. And there's upside in their headquarters now, which is getting deployed with some more video conferencing and whatnot. So I think these 3 factors, the customer mix, land-and-expand, cross-sell, is leading to a very nice tailwind in terms of net retention.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [37]

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And maybe just to follow up on that, Mitesh. Obviously, it kind of relates to the Public Storage win, but a 2.5-week deployment, that's a lot quicker than I would have expected for a company of that size. As you guys have a lot of momentum in the enterprise and then with channel partners, how should we think about average implementation time lines for a lot of these customers?

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David D. Sipes, RingCentral, Inc. - COO [38]

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Yes. So the question is implementation. And normally, we'll see implementation occur in 60 to 90 days at major enterprise organizations, and with the one exception being sometimes distributed retail, which may phase in with the assistance of the target's IT organization, and sometimes, that can go 6 or 9 months. Now with Public Storage, they were in a situation where they wanted to move very quickly. So they leveraged us. They leveraged -- we leveraged our partner, and we created a model quickly that they could roll out super rapidly across their entire organization. So we have the ability to move even faster than most of our target companies can. And so that's where you see kind of that performance. And it is -- it's very different than what the legacy environment has been and how that could deploy globally.

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Operator [39]

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Our next question comes from the line of Kash Rangan with Bank of America Merrill Lynch.

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Unidentified Analyst, [40]

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(inaudible) from Bank of America. Two questions, one, a broad question. Vlad, a question for you. As you see the pockets of automation in our industry, you got a UCaaS pocket, where you guys are clearly leading; then you got a collaboration pocket, you got the likes of Slack; and then you got the content pocket, the likes of Dropbox and so on and so forth. As we evolve, the way we do work changes, the way we work today is different from what we did 10 years back, 20 years back, for those that have been around that long. How do you see the evolution of our industry, your industry, to accommodate how work gets done in the next 5, 10 years, which is probably going to be very different? Do you, in other words, see these worlds converging or these pockets remaining pretty discrete? And then a second more tactical question. With the rise of enterprise, I'm curious how you're planning to grow your systems integrator practice to avoid potential pitfalls as you scale this business because the implementation, the quality of implementation at large enterprises will often dictate the flow of the pipeline in future years. That's it for me.

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Vladimir G. Shmunis, RingCentral, Inc. - Co-Founder, Chairman & CEO [41]

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Yes. Great. No. Wonderful questions. Okay. So taking them in order this time. So as far as how is work going to be evolving, well, look, it's always in years, right? It's called digital transformation. We're just a part of that. So yes, it's true. We are leading in a very large and very underpenetrated segment. But it's -- like you say, it really is all the same of part of the same train. So people are doing more work on the road. People are relying on their mobile devices more and more. And very importantly to us and our particular differentiator is there is a -- there are quite a few apps. There is a glut of apps and services out there where RingCentral differentiates is we are actually taking the position that less and more -- is more. And we are, for example, the only UCaaS provider out there with fully integrated team messaging and collaboration as part of our suite as well as world-class video, okay? And we would see more of that trend playing out. It's clearly been working for us, especially as of late, as people are beginning to see value in RingCentral, in not just as a plain voice -- legacy voice replacement. And there is a lot of value there, too. Don't get me wrong. But specifically, in replacing and consolidating the video and web conferencing systems, their contact center, et cetera, et cetera. So I think we shared at the Analyst Day that -- we shared 2 things. Firstly, we said that use of nonvoice features of RingCentral is growing in triple digits. I already mentioned this a little earlier today. While use of voice is -- fully presents still healthy growth, but the other one is growing in triple digits. And we also said that out of top 15 accounts, there is not a single one we have that uses only voice. Everyone uses a multitude of these modalities that we provide, and we see that ratio growing. So we'll see more of the same. There will be more -- I don't know if it's going to be necessarily vendor consolidation. But I would say that we have clearly demonstrated that one can provide a world-class solution in voice, in video, in contact center and very important, in team messaging. So we'll just continue along those lines. Sorry. The second part of the question is again what?

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Unidentified Analyst, [42]

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The professional services. How do you -- [how is that pipeline building]?

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Vladimir G. Shmunis, RingCentral, Inc. - Co-Founder, Chairman & CEO [43]

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Yes. Dave will provide more detail, but at a high level, one of the very major benefits of the cloud is that it is substantially easier to deploy. And with Public Storage, for example, which, in the end, is a major brand, a Global 2000 company, to be able to deploy them in a few short weeks, simply not possible with a legacy solution. So we are definitely seeing that there is much less need for a true systems integrator. I'm not saying that there is no place under the sun for them, but there is just much less need. And we're certainly doing everything we can to make deployments as much -- as easy as possible and as much self-service as possible. Dave, maybe add a little bit more color.

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David D. Sipes, RingCentral, Inc. - COO [44]

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Yes. On the professional services, we've expanded that significantly. We've done in the field deployments in over 30 countries now. We've taken a model that is both probably half internal resources as well as half partner resources. So we've been training partners to continue to deliver this for us. And as we get into larger enterprise, more complex products with contact center and things like our Pulse product that creates integration and workflow changes, I think there'll be more opportunities for partners and potentially system integrators to help us in that pursuit.

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Operator [45]

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Our next question comes from the line of Meta Marshall with Morgan Stanley.

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Yuuji P. Anderson, Morgan Stanley, Research Division - Research Associate [46]

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It's Yuuji Anderson on for Meta. Could you comment on the productivity you're seeing with some of your newer channel partners? Are they trending? Are their productivity trending at a similar rate that you have been seeing with some of your more experienced partners? And with that, how you do you think about the opportunity to bring on additional channel partners? Are you -- will you be focusing on particular verticals? Or how are you identifying them?

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David D. Sipes, RingCentral, Inc. - COO [47]

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Yes. Productivity is strong. We've focused on some national partners more recently this year. And their ability to educate their sales forces is high, and they're able to swing product quickly on productivity. We've also seen some of our largest partners continue to perform at rapid rates. Our largest partner last year has already exceeded their goal in the first half of this year from what they did last year. So we're seeing productivity ramp up with existing and with new partners. We've also improved our ability to educate, onboard and bring those partners to fruition. So I think we've improved the entire ecosystem, the RingCentral ecosystem for partners.

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Yuuji P. Anderson, Morgan Stanley, Research Division - Research Associate [48]

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Okay. And then maybe just a broader market question. In terms of the incremental customer wins or customer opportunities you might be seeing there, are you seeing any broader changes in terms of what are the inflections there? Like, is it new cloud initiatives by customers? Or is equipment aging out? Like just any broader commentary would be helpful.

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David D. Sipes, RingCentral, Inc. - COO [49]

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Yes. It's the digitalization of the enterprise and the movement to move all applications to cloud, I think, is a broad megatrend that's helping. And the transition of this category to the cloud, we're still single digits penetrated. So there's still a long ways to go. But as people have moved productivity suites to the cloud, have moved other applications to the cloud, there's a desire to take all their applications and get the IT organization into being business process-oriented and less infrastructure management-oriented.

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Operator [50]

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Our next question comes from the line of Sterling Auty with JPMorgan.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [51]

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Yes. I want to follow up on an earlier question around France and U.K. I'm just curious, is there any structural differences in terms of the channel in those markets? And what have you done to kind of capitalize on it?

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David D. Sipes, RingCentral, Inc. - COO [52]

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The channel tends to be stronger outside of the U.S. So we see importance to invest in the channel infrastructure there. The nice thing is we built that infrastructure in the U.S. by being a mix of direct and channel. We're still a mix of direct and channel in those markets, but it will slant a little more channel than direct. And those organizations are bringing -- those channel partners are bringing organizations they've worked with for a long time. And so they bring a trusted relationship, introducing them to the RingCentral product.

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Sterling Auty, JP Morgan Chase & Co, Research Division - Senior Analyst [53]

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Got it. And then one follow-up, Mitesh, for you. Noticed that, I think, DSOs jumped 3 or 4 days. Is that an indication of linearity in the quarter or perhaps just more international revenue being added to the mix?

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

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It's the former, Sterling. As we are moving to the mid-market and enterprises, it is -- usually tends to be more of a back-end-loaded quarter.

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Operator [55]

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Our next question comes from the line of Zack Turcotte with Dougherty.

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Zack Turcotte, Dougherty & Company LLC, Research Division - Anlayst [56]

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Zack on for Catharine Trebnick. Just a couple of quick ones on Collaborative Contact Center. First, I'm wondering if you have any metrics or KPIs specifically related to contact center. And then second, just the importance of your channel partners and the role they play in your sales of contact center.

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David D. Sipes, RingCentral, Inc. - COO [57]

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Contact center, we've said, is influencing in our largest deals. We see it in over 50% of our largest deals. So it's important as we move into mid-market and enterprise. It's -- also, you see it both in the initial deal. You'll see it in -- if it's not in the initial deal, it's an opportunity for follow-on deal. And we're educating our channels, and they're starting to bring us deals that may be contact center-leaning versus UCaaS-leaning because they know there's the cross-sell opportunity between the products over time.

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Operator [58]

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Our next question comes from the line of Mike Latimore with Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [59]

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Just few ones here. I guess, you obviously replaced a lot of on-premise legacy systems. I guess, are you seeing any increasing trend towards replacing other cloud providers, including some of the telco-based services here in terms of the mix or the pipeline?

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David D. Sipes, RingCentral, Inc. - COO [60]

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Telco-based services as in, obviously, business, communications, we do replace all the product categories we provide with video suppliers, with messaging suppliers, with UCaaS, PBX suppliers and contact center providers. We don't do ISP services, obviously. But any of the core applications, business communication applications, we do.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [61]

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I guess, I meant, are you -- like, when you're winning in the mid-market in particular, are you replacing third party -- or other UCaaS providers as opposed to on-premise? Is that -- are you seeing more kind of opportunity to replace other cloud providers, UCaaS providers?

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David D. Sipes, RingCentral, Inc. - COO [62]

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We do have displacements of other cloud providers, but just because of the sheer numbers and the way the math works, the vast majority is replacing legacy systems today.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [63]

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Yes. And then on the international side of things, I guess, obviously growing quickly. I don't have a sense of whether that's 10% of bookings, 20%. Like any general ballpark on what percent of bookings that are coming from the international market to this point.

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Mitesh Dhruv, RingCentral, Inc. - CFO [64]

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Sure, Mike. So international is -- sub-10% of revenue is the way to think about it. And -- but the bigger angle on international is it is more the Global Office deployment we have, wherein we have turned on the technology for U.S. and U.K. and now Australia and multinationals to turn on their Global Offices and have seats across the globe. That's one. And then now, we are doubling down with GTM in those countries. So that -- it's a bit of a different spin on international. But to answer your question more sort of technically, it's less than 10% of revenue.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [65]

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And I think you said you had the largest deal in the company history in the quarter. Can you give like seat count or anything like that?

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Mitesh Dhruv, RingCentral, Inc. - CFO [66]

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Details around the deal, of the largest in history, is that the question?

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [67]

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Yes. You said you had the largest one in your history in the quarter. Just seat count or something like that.

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

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We're not going to give you seat count, but it's -- I'll give you some color. It's a large company where we had both contact center and PBX. And it was one of the -- in terms of sales cycle, this was one of the deals which fell in fairly quickly. How Dave was saying with Public Storage, it was fairly quick sales cycle. This was one of the other ones where the sales cycle was really quick because of our brand recognition and the referenceability we have with the CIOs. And so yes, it's a step in the right direction there.

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Operator [69]

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Our next question comes from the line of Will Power with Robert W. Baird.

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Charles Erlikh, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [70]

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This is Charlie Erlikh on for Will. Could you talk a little bit about the opportunities in targeting the true enterprises or the Global 2000? What are some of the things you might be doing to target those customers specifically? And would you say you're more or less confident now versus, say, 6 months ago that those customers will start adopting full cloud solutions in a more meaningful way in the near to medium term?

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Vladimir G. Shmunis, RingCentral, Inc. - Co-Founder, Chairman & CEO [71]

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Yes. Vlad here. I'll take the last part of the question, which is, are we more or less confident. We were always confident. Now we have tangible proof points. And we see no reason why every Global 2000 enterprise wouldn't eventually end up in the cloud, with the one exception that in certain geographies, there are regulatory barriers. But for the regulatory barriers, we fully believe it's simply a matter of when, not if. And as far as what we are seeing on the ground today, maybe Dave can address.

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David D. Sipes, RingCentral, Inc. - COO [72]

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Yes. It's -- definitely, we're seeing that movement now, and we're seeing the Global 2000 look at UCaaS. Public Storage is a Global 2000 company. So that's one win we have there. We've also built a dedicated sales team focused on these named accounts.

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Operator [73]

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Ladies and gentlemen, we have reached the end of our question-and-answer session as well as our conference. Thank you for joining RingCentral's 2018 earnings call. You may now disconnect.