Darren Yip - Director, Investor Relations Vladimir G. Shmunis - Chairman & Chief Executive Officer Clyde R. Hosein - Chief Financial Officer & Executive Vice President.

Terry F. Tillman - Raymond James & Associates, Inc. Brad Zelnick - Jefferies LLC Nikolay Beliov - Bank of America Merrill Lynch Mike J. Latimore - Northland Securities, Inc. Brian J. Schwartz - Oppenheimer & Co., Inc. (Broker) Mark Sue - RBC Capital Markets LLC James E. Faucette - Morgan Stanley & Co. LLC Heather Anne Bellini - Goldman Sachs & Co.

Sterling Auty - JPMorgan Securities LLC.

Greetings and welcome to the RingCentral third quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Darren Yip, RingCentral's Director of Investor Relations. Thank you, Mr. Yip. You may begin..

Thank you. Good afternoon and welcome to the RingCentral's third quarter 2015 earnings conference call. I'm Darren Yip, RingCentral's Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; and Clyde Hosein, Chief Financial Officer. Our format today will include prepared remarks by Vlad and Clyde followed by Q&A.

The primary purpose of today's call is to provide you with information regarding our performance for the third quarter 2015 along with our financial outlook for our fourth quarter and full-year 2015.

Some of our discussions and responses to your questions may contain forward-looking statements including statements regarding our expected financial results for the fourth quarter and full-year 2015, our future plans, prospects, and opportunities, trends in the business communications market, our expectations regarding our expansion internationally and up-market, our service provider and other reseller relationships, expected benefits of our integrated partnerships, open platform, the Glip acquisition, and new products and services, our growth strategies, current and future market position, and expected growth.

These statements are subject to risks and uncertainties.

Actual results may differ materially from our forward-looking statements and projections for a variety of reasons, including but not limited to, general, economic, and market conditions, the effects of competition and technological change; success of our marketing, sales and retention efforts; and customer demand for our acceptance of our products and services.

A discussion of the risks and uncertainties related to our business is contained in the filings with the SEC and is incorporated by reference into today's discussion. We disclaim any obligation to update information contained in our forward-looking statements whether as a result of new information, future events or otherwise.

I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our third quarter 2015 earnings press release, our non-GAAP to GAAP reconciliation, our periodic SEC reports, a webcast replay of today's call, and to learn more about RingCentral. With that, let me turn the call over to Vlad..

Thank you, Darren. Welcome everyone and thank you for taking the time to join us today. RingCentral had an outstanding third quarter with total revenues organically growing 35% year-over-year to roughly about a $300 million exit run rate.

Additionally, our RingCentral Office business grew 48% year-over-year and is now an over $220 million business in its own right. Along with our high-growth, I am very pleased to announce RingCentral's first-ever profit a quarter earlier than we forecasted.

Our results were driven by continued innovation underpinning our strong revenue growth and scale in our cost structure, resulting in a 12 point improvement in operating margin year-over-year. RingCentral has exhibited a solid combination of topline growth and margin leverage.

I would like to thank our employees, customers, and partners of RingCentral for helping us achieve this major milestone. This is our testament to the large market opportunity and our leadership position.

Our dedication to innovation through mobile-centric software-as-a-service technology enables us to address the very large global greenfield and replacement business communication market, that total tens of billions of dollars annually.

RingCentral's cloud-based software provides rich functionality; it's easy to use, easy to deploy and manage and is designed to address needs of modern distributed and mobile workforces. We continue to extend our market leadership. This was recently recognized by Gartner.

Gartner placed RingCentral furthest to the right and north in the Leaders Quadrant in the 2015 Magic Quadrant for Unified Communications-as-a-Service. Gartner sited RingCentral's key strength, it's user experience, support for accounts over 1,000 employees, API connectivity with leading cloud applications and mobile search user deployment.

Our success can be attributed to a number of key drivers that should continue to position us for strong growth in the future. This includes, technology leadership, expansion up-market, international reach, and strong execution with our service provider and channel partners.

So with regard to technology, RingCentral has the leading cloud communications platform on the market today. It is very difficult for on-premise legacy PBX vendors to address the needs of modern distributed and mobile workforces.

Our mobile-centric software is unique in title integrating core communication functionalities like voice, text and fax, as well as audio, video, and web conferencing, and now with messaging and team collaboration. Our open platform integrates with best-of-breed business applications for productivity, sales, support, analytics, and storage.

Businesses today require this level of capability to be more productive and to maintain their competitive edge. We continue to expand our integration partnerships with the most recent addition of Microsoft Office 365 to our list of out-of-the-box integrations, which already includes Box, Dropbox, Google for Work, Salesforce, and Zendesk.

Additionally, RingCentral Connect open platform allows customers and independent software vendors to create custom workflows and analytics. For example, Sikka Software, a healthcare practice management software provider, leverages our platform to automatically present critical consolidated patient information immediately when a patient calls.

To extend our technology leadership, I am thrilled to announce the general availability this week, ahead of schedule, of our third RingCentral Office integration with Glip, a company we acquired in Q2.

Glip has powerful team messaging and collaboration capabilities, allowing RingCentral to deliver the industry's first integrated cloud business communications and team collaboration solutions. Glip already helped deliver a significant win of 1,700 RingCentral Office users at the prestigious Columbia University.

The university cited Glip's functionality and integrated communications experience as a key factor in their decision. Together, these and other innovations continue to extend our technology leadership in the market. Second, our expansion up-market is a significant growth driver.

In Q3, ARR for customers with at least 50 users grew by over 100% year over year for the sixth consecutive quarter and accounted for about 25% of RingCentral Office bookings. This was up from the approximately 20% we have been reporting over the past few quarters.

We believe we have now reached an inflection point where enterprises are now comfortable using the cloud for their business communications needs. For example, we have recently won 1,000 seats with MINDBODY, a newly public cloud-based business management software and payments platform for the wellness industry.

MINDBODY required a platform to integrate their business communications with salesforce.com and Office 365 implementations on three different continents. We were uniquely qualified to meet their needs. Another area helping us win larger accounts is our new RingCentral Contact Center product, offering simplified and transparent pricing and packaging.

It is off to an excellent start, with over 20 wins in Q3. With our rapidly expanding capabilities like our open platform Glip and our powerful global capabilities, RingCentral delivers a unique value proposition for large enterprises.

Third, international reach; the cloud is a superior approach for distributors of innovation, especially internationally. The complexity of managing multiple on-premise systems in multiple countries with multiple service providers creates massive administrative overhead for an enterprise.

RingCentral's global cloud platform eliminates this complexity for our customers in a cost-effective manner. With RingCentral, employees can use multiple endpoint devices such as mobile, desk phones, and softphones on PCs and Macs from anywhere in the world.

Currently, we have RingCentral users in over 140 countries, with local calling numbers available in over 70 countries. We have multiple enterprise customers who have chosen RingCentral Office to meet their global needs.

For example, Medallia, a leading software-as-a-service provider of customer experience management solutions and with offices in Palo Alto, New York, Buenos Aires, London, Paris, and Hong Kong recently selected RingCentral to power its global operations. The fourth key growth driver is our unmatched relationships with service providers.

With AT&T, BT and TELUS, we are the only pure play SaaS business communications company with major carriers reselling our solutions. Overall, the service provider channel has the strongest quarter to date with healthy enterprise customer wins across the board.

For example, in Canada, working with TELUS, we won a 250-seat account replacing the customer's legacy PBX in order to serve their highly mobile workforce.

Given these drivers and our track record, momentum, and strong commitment to innovation, I am confident that we will continue to execute and will remain at the forefront of the powerful and continuing shift in how businesses communicate worldwide.

Moving forward, we expect continued leadership through innovation, increased traction with enterprise customers, ongoing global expansion, and further momentum from our indirect channels, including service providers and VARs.

In summary, we have the vision, team, technology, and the business model that parallels the best-in-class SaaS companies with a combination of growth and leverage. We expect to maintain our leadership position in moving business communications to the cloud worldwide.

And with that, I'll now turn the call over to Clyde for a review of our financials and guidance..

Thanks, Vlad, for your business update. Very exciting times for RingCentral. I will now turn to our financial results and forecast for the upcoming quarter.

The highlight of the third quarter from a financial perspective was the combination of a very strong top line growth and continued operating leverage that resulted in us posting an operating profit as well as breakeven EPS on a non-GAAP basis. As Vlad noted, this is a quarter earlier than we had anticipated.

Total revenue for the third quarter was $76.8 million, up 35% year-over-year and 9% sequentially. This was above our guidance of $74 million to $75 million. Subscription revenues grew to $70.3 million, up 35% year-over-year and 9% sequentially. On a constant currency basis, our year-over-year growth would have been a point higher.

Product revenues grew to $6.5 million and contributed 8% of revenue in the quarter. As a reminder, we do not develop, manufacture, or otherwise touch the delivery of physical forms, but provide these as a courtesy to our customers of which more and more are choosing to use our leading softphones and smartphone app.

We rely on providers like Polycom to develop and manufacture these devices and fulfillment partners to successfully serve our customers. Total annualized exit monthly recurring subscriptions or ARR, grew to approximately $300 million, up 35% year-over-year and 8% sequentially.

The ARR for our RingCentral Office grew to approximately $228 million, up 48% year-over-year and 11% sequentially.

This growth continues to be driven by a combination of user and ARPU growth year-over-year, as larger customers continue to adopt higher-priced premium and enterprise editions and seek our fully integrated team collaboration on Contact Centre capability. Our focus on customer satisfaction continues to yield excellent result.

Our overall net monthly subscription dollar retention rate was over 99% in the quarter. Office net monthly subscription dollar retention was once again over 100%. It is common for customers to adopt RingCentral Office in part of their organization and expand over time.

Before I move further down the income statement, I want to remind you that my commentary will be focused on non-GAAP results. A reconciliation of all non-GAAP to GAAP results is provided with our earnings press release issued earlier today.

Subscription gross margin improved to a record 76.5% in the quarter, an improvement of 140 basis points from the second quarter, and 440 basis points year-over-year; the result of continued leveraging our multitenant SaaS model.

This represents our 10 consecutive quarter of improvement and our second consecutive quarter being within our target range of 75% to 80%, on par with those of other leading SaaS companies. This includes the benefit of scale in our infrastructure and our ability to drive lower transport costs.

As we move up-market, larger customers are also buying higher priced editions which are accretive to gross margins. Product gross margin was 18.7% in the quarter, an 11 point increase over Q3 of last year, driven primarily by continued efficiencies in the supply chain.

Although product mix may lead to some variability quarter-to-quarter, we continue to expect a product gross margin of about 10%. Consolidated gross margin, which includes subscriptions and product was 71.6%, up from 66.5% in Q3 of last year and 70.2% in the previous quarter.

Sales and marketing expenses were $33.1 million for the quarter or 43% of revenues down a bit from 44% from Q3 of last year and about 47% from the last quarter. Even while increasing penetration of larger customers and maintaining growth with smaller customers, the unit economics in the model remain attractive.

Each dollar of sales and marketing invested continues to contribute $8 of revenue and $5 of contribution margin over the projected life of an Office customer. R&D expenses were $11.5 million in the third quarter or 15% of revenues, improving from 19% of revenues in Q3 of 2014 and flat from last quarter.

G&A expenses were $9.9 million in Q3 or 13% of revenues, improving from 14% of revenues in Q3 of 2014 and flat from last quarter. We had an operating profit of $500,000, which equates to an operating margin of about 1%. This is an improvement of 12 points from Q3 of last year and 550 basis points from the second quarter of this year.

This was significantly ahead of our guidance of negative 3% to 4% for the quarter. This marks the fourth quarter in the history of the company that we have been profitable on the operating line and we accomplished this goal one quarter earlier than originally expected, all the while keeping our organic revenue growth rate in the mid-30s.

Non-GAAP net income improved to breakeven compared to a net loss of $7.8 million in Q3 of last year and a net loss of $3.5 million last quarter. Non-GAAP net income per share was also breakeven, better than our Q3 guidance range of a loss of $0.03 to $0.05 per share.

Share count was 74 million fully diluted shares, higher than our guidance because we previously assumed we would be reporting a non-GAAP loss, in which case basic and diluted share counts are the same. With our profitability in Q3, we utilize the treasury method to calculate fully diluted shares.

Our earnings per share had a slight headwind due to currency remeasurement effect on our foreign balance sheet. This amount is embedded in our other income line. In Q2 currency remeasurement represented a benefit of roughly $0.01 of EPS.

Given that this is non-operational, non-cash item, which creates volatility in our earnings from transmission effects of the change in currency, we will pro forma this effect positive or negative from our future non-GAAP results. On a GAAP basis, on Q3 net loss was $6.3 million or $0.09 per share.

The difference between our GAAP and non-GAAP results includes $5.8 million or $0.08 per share in stock-based compensation and a net headwind of about $0.01 from the amortization of intangibles of other items related to the Glip acquisition, both of which were excluded from our non-GAAP results.

We ended Q3 with cash on short-term investments of $132 million compared to $133 million at the end of Q2. Deferred revenue was $34 million as of September 30, an increase of 11% sequentially and 46% year-over-year.

Deferred revenue grew faster than revenues year-over-year due primarily to the impact of larger customers who are more receptive to annual invoices. For the quarter, cash flow from operations was positive $1.8 million compared to positive $3.9 million for Q3 of last year and positive $1 million for Q2 of this year.

Now, turning to our guidance for the fourth quarter and full-year 2015. For the fourth quarter we expect revenue of $80 million to $81 million or growth of about 29% to 31% year-over-year. We expect non-GAAP operating margin of 0% to positive 1%.

This should lead to a non-GAAP earnings per share of zero plus or minus a $0.01 based on 75 million weighted average fully diluted shares outstanding. For the full-year 2015, we expect revenue of $293 million to $294 million or growth of 33% to 34% year-over-year, which is an increase from our prior guidance of $288 million to $292 million.

Non-GAAP operating margin of approximately negative 2.5%, an improvement of a point from our prior guidance of negative 3% to 4% and an improvement of about 11 points over fiscal 2014.

This should lead to non-GAAP loss per share of $0.12 to $0.14 based on 70 million weighted average basic shares outstanding, an improvement from our prior guidance of a loss of $0.16 to $0.20. In summary, our results in the third quarter have demonstrated the successes of the strategies that Vlad outlined earlier.

Our revenue growth rate remains amongst the highest in our industry and is even up sequentially. Our Subscription business continues to see margin expansion. We've now posted our second consecutive quarter of positive operating cash flow and have posted our first quarterly profit in our history.

I'm very excited about the direction we're heading and look forward to a strong finish in 2015. And now I will turn the call over to the operator to take your questions..

Thank you. Our first question comes from the line of Terry Tillman from Raymond James. Please proceed with your question..

Hey, good afternoon, gentlemen.

Can you hear me okay?.

Yes, we can, Terry..

Hey, Vlad. Hey, Clyde. So first, nice to see this actual acceleration in the organic business and top line growth and also the profitability. That was unexpected, so nice job on that..

Thank you..

Two quick questions. In terms of the Glip integration, you put out a press release at about the same time as the earnings release and it doesn't seem to talk about the separate monetization strategy or something that could cause an uplift when somebody is buying Office with Glip being utilized. I guess I'm curious.

Am I reading that the right way? And is it more of just a competitive dynamic where you can differentiate in sales cycles, but you don't see it as a separate monetization strategy?.

Okay. Yes, Vlad here, Terry. So, first of all, thank you for the kind words. I'm very happy with our recent results. On Glip, look, clearly we're planning to monetize it.

And another recent press release is we've announced Columbia University and specifically cited that Glip integration and bringing communications and collaboration together was one of the key factors in the decision. So that's a major 1,000-plus seat win with more opportunity to expand, which to be blunt, we probably would not have had without Glip.

So we see more of that to come. I think we were also clear in the press release that Glip will continue to be available on a standalone basis as well as part of RingCentral Office. So inasmuch as it's being utilized as a standalone product, we do have monetization strategies attached to that. So we absolutely expect to leverage it both ways..

Okay. And I guess on Columbia University, it seems like a good win. That's well above – if my math is correct, which sometimes I guess it isn't, but that's well above 50 users, if I'm not mistaken.

So that's a large win, and that kind of – what's that?.

It seems to us the same way. It is more than 50 users..

I'll round it up, yes. And so in that kind of situation, are you actually competing against the incumbent? I assuming it's a legacy PBX provider, and that is the main competitor.

And it's more about inertia, why should you change, we can provide something that is more cloud-enabled going forward or is it actually, they are absolutely steadfast on moving away from the legacy PBX guys and then it becomes a cloud question and then you're competing against maybe service providers that have another cloud option other than you or a Broadsoft enabled solution or an 8x8.

I guess in that specific deal, who would you have competed against? Is it an incumbent trying to maintain a foothold, or is it more cloud providers? And was this a direct deal or a reseller driven deal? Thank you..

Sure. So, Terry, the biggest competitor here was an incumbent on-premise provider that fought really hard for it. But for all the reasons Vlad gave earlier and all the reasons you gave, which is people see the cloud happening, I think we won out on that one. But the big fight was with an on-premise existing provider..

As is the case in vast majority of these situations, especially up-market. And we've been very clear, I think, literally from the day we IPO'd, the big fight is in replacing and diverging the legacy ecosystem into the cloud, where we are very, very comfortable that that will take place. It's taking place as we speak.

And we believe that we are in a solid leader's position there as far as leading this migration to the cloud, and certainly investing across a number of initiatives, starting with innovation, to maintain and cement our leadership position..

Our next question comes from the line of Brad Zelnick from Jefferies. Please proceed with your question..

Great. Guys, this quarter, from all aspects that we look at the story, you've really done a phenomenal job, so congratulations to you, two questions. For starters on pricing, as we listen to what's happening out there in the market, there are some very aggressively priced deals and actions and some of your competitors are coming in.

And if I listen to the remarks, I think, Clyde, you had said that Office ARPU has actually gone up, but it sounds like that's a function of mix, which is great.

But if you look at the business on a like-for-like basis, what are the latest trends in terms of average discount?.

Average discount is hard to say, Brad. As we mentioned, ARPU is increasing. And as we said in the prepared remarks, part of it is that. Very rarely do we see winning deals on price. It happens from time to time. But if you look at the number of deals, they're in the vast majority. And part of that is the value proposition in itself.

Customers save anywhere from 30% to 60% over their existing solutions. So they're already saving a fair amount. The biggest challenge for us is proving to them that cloud functionality could be delivered with every bit as reliability and performance as they are used to today. It's less of a price issue.

So I think the price competitiveness is more anecdotal than it is in reality. Not that we never see it, it's a small amount of the case..

That's helpful. And just on margins, so it's great to see you get to profitability a quarter sooner than you originally expected. The progression on gross margin continues to exceed expectations. You're already in your long-term target range on service margin – gross margin.

But if we peel that back and then look to where we are on op margins, you certainly have a lot of headroom at least from here to ultimately getting to I think the 20% to 25% long-term target.

And if I look even to the guidance for Q4, you've actually guided us at the midpoint 50 basis points, even a little bit down from what you achieved in Q3, which we appreciate is a function of overachieving on the top line this quarter.

But I'm not nitpicking from quarter-to-quarter on basis points, but can you just remind us philosophically, Clyde? As we look out a year from now or two years from now, and you think about the investments that you're making for the future, is there may be a way to talk about the opportunity and the investment philosophy that you have and how we should think about margins kind of medium to longer term?.

Great question, Brad. Look, we had profitability earlier, putting aside any seasonality that you might hit say for example in Q1, for example in the forecast obviously, only forecast we're providing right now is for Q4. Putting aside any seasonality, this is not a flash in the pan.

We don't intend to show you one quarter, we're profitability and move on. So, I think that is the strength of the business model and you highlighted some of the key aspects including service gross margin. I think on a going forward basis and inherent with the SaaS model, it's a very large underpenetrated market. We've got an excellent product.

The market opportunity ahead of us is huge and so you've got to invest sales and marketing in the mid-40s type range. With that in mind – so we'll continue do that, which will drive topline growth. That's our continued strategy to win a number of customers.

Remind everyone that the unit economics for every customer we acquire is – every dollar is $8 of revenue and $5 of lifetime profit. You do that math; that translates into 20%, 30% operating margin in year three and thereafter. That's what you see in the model. So it makes sense for us.

It continues to make sense for us to keep investing in adding new customers and we'll do that. The consequence of that is as you do that, your near-term profitability will be affected. Having said all of that, I do think you'll see improvements in our operating margins from quarter to quarter, I think as you said, even the noise.

But our focus from here will be while we improve on that on a moderate basis, we'll continue to drive that topline at a very industry-leading clip..

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

Guys, thank you for taking my question and congratulations on a nice execution. Clyde, when you look at the revenue growth drivers that you've added since the IPO, maybe if you can help us rank them in terms of business impact, in terms of incremental subscription revenues, number one, I guess the domestic up-market.

Number two, international direct business, then international Telco, the Connect Platform, Call Center, you had Glip and Office 365 and then Google relationship to the extend is a driving business.

What are the main drivers of the business right now?.

The good news is all of those things are driving the business. We've got multiple vectors of growth in the engine, and from quarter-to-quarter some of these might take precedence over another one.

Having said that, I think up-market, since the IPO has been very robust for us, one metric we put out there is our midmarket which is 50-plus – 50 to 1,000 seats, if you may, has been growing over 100% over the last six quarters. So that's demonstrated and now represents about 25%-ish of our bookings. So that's certainly well.

The next one I would put on that list, keeping in mind, Nikolay, that this changes quarter to-quarter, but on a sustained basis, I would say indirect, which includes our VARs as well as our service provider partners, we've got three of them on the platform now. I would say they are contributing probably next, and third international.

I think international has got a lot of opportunities ahead of us in a number of flavors both say U.S. and UK companies, look to have a single platform globally as well as new customers in other geographies. Both of those are potential growth areas for us.

So in summary, I would say up-market, indirect including VARs and service providers, followed by international has been – I think those three will continue, but the mix might change from year-to-year..

Got it.

And another question for you, when you look at the competitive landscape now versus at the time of the IPO, when you look at the legacy vendors, the pure cloud vendors in Q1 which you've been doing and now they might subscribe for business, what have been the changes and what opportunities and concerns are you seeing?.

Sure. So we actually don't see that much change as far as vendors with their own technology platforms. That continues to be a fairly small and consistent set. Some of the names you mentioned, Vonage entered this business through acquisition. We continue not seeing them as a core technology provider.

We think that us having a platform and investing rather heavily into R&D is and will continue to be a source of continued competitive advantage. So that's on that one.

As far as subscribe for business is concerned, we will hear about it from time to time, but we've already highlighted our emerging relationship with Microsoft Office and Office 365 in particular.

So I will also refer you to the last Gartner report, which made it very clear that they consider us to be in the lead on both the visionary scale as well as ability to execute easily this quarter. So the fact of the matter is, if you as a business want to run your business communications through the cloud, Microsoft today does not have a solution.

They're talking about it, but today's not a reality. Ours is, and we feel pretty good about our ability to continue competing effectively moving forward..

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

Yeah, thanks very much. Excellent quarter. On the Columbia, I know you are replacing a legacy phone system.

Are you replacing anything else there like a web conferencing service or instant messaging service or any other major technology categories you are replacing there?.

Mike, RingCentral has the capability of doing all of that, as you know. But I'm not aware if they did replace that, but they have the capability to use it. The key was collaboration with Glip and the strength of RingCentral and the strength of the platform..

And in terms of your....

Also integration, Mike, with Google for Work, so there are a number of things in there. I don't know offhand if other replacements happened, but it certainly has that capability..

Yeah.

And in terms of your new subs added in the this last quarter, how many come from current customers let's say – the expansion, how much of that is driving your top line?.

Most of it is new customers. There has been some, but I think the vast majority is new additions to it. The upselling, while there's been some, I think that's an opportunity ahead for us. But to-date, Q3 has been new adds..

Okay. Thanks. Great quarter..

Our next question comes from the line of Brian Schwartz from Oppenheimer. Please proceed with your question..

Hi, thanks for taking my questions this afternoon. I too would like to pass along congratulations on a great quarter, a couple of questions I wanted to ask. I wanted to ask a question on the Columbia deal, but a little bit different question about it. Columbia is a very prestigious brand.

Their university – it's great to hear that, I don't remember hearing you guys talk a lot or even talk in the past about the higher ad-tech vertical or even the education vertical in general.

Can you talk a little bit about what you're seeing in terms of new vertical opportunities and if there is any strategies going forward to capitalize on it, may be through your Glip acquisition? Or is this just – maybe just a one-off deal in the education vertical that came to you guys through the acquisition relationship? And then I have a follow-up question..

Sure. Look, certainly we don't think – we hope it's not going to be a one-off. SLED is one of the identified verticals that we have. We do have a concerted effort.

Needless to say, with a prestigious institution like Columbia being a referenceable customer, we expect that we'll be received yet better in other educational institutions, whether it be higher end education or lower. Obviously, there's a wider base with colleges that are not Columbia. So we feel very good about it.

We just think it's a fantastic reference case and it really highlights, plays to our strengths of combining communications with collaboration, which is a first in the industry..

Thank you. Vlad, one other follow-up question I just want to ask you on the macro and really the end market. It sounded to me in your introductory comments that you sounded pretty excited; you maybe even used the word inflection in terms of what you're seeing in the opportunities in the up-market.

It makes me think that, that what we're seeing in terms of the SaaS transformation out there is starting to pervade here into business communication So what I wanted to ask you Vlad is, in the up-market deal discussions, are you still evangelizing the cloud for business communications or is it starting to become apparent that these up-market businesses, they've had success with SaaS and maybe there are other business processes like CRM and thus RingCentral is starting to see increased interest levels in the up-market with noticeably less cloud evangelizing in the sales process..

It's actually yes to all of the above. Yes, we see an inflection point. Yes, it's becoming much easier to convince people that cloud for business, IT in general and now for business communication in particular, is a viable and a superior way to go.

But having said that, we absolutely are evangelizing because the vast majority of our new customers are used to legacy systems, so we do need to educate them on the particular benefits.

But it's now becoming much easier to do so because many of them have already embraced the cloud in their other disciplines, be it CRM our HRS or marketing automation or what have you.

So we are making sure that they understand that the benefits of savings and efficiencies they can achieve with communications through the cloud are at least as great as what they're seeing with other aspects of business IT..

Our next question comes from the line of Mark Sue from RBC Capital Markets. Please proceed with your question..

Thank you. Gentlemen, when I look at your financial metrics, the churn is quite low and the lifetime value math is still scaling.

So the question is, why not spend more in such a large TAM, particularly when you're gaining market share? When you look at your long-term model, are there any thoughts to actually push the accelerator spending for more custom acquisitions since in technology oftentimes the winner can take a substantial amount of the market.

So would you consider spending more to get more?.

So, Mark, thank you very much, a little bit of a contrast to the question Brad asked earlier. But that's the balance we've got a make. We've got to balance growth as well as profitability. Certainly, the results to date, we've improved operating margin over 20 points over the last two years since the IPO, demonstrating the success of the model.

So yes, if this was a private company completely with an unlimited balance sheet, we would do exactly what you're describing. The reality is we have a defined balance sheet. We know what or at least we think we do, understand what investors are looking from us and we've got to make that balance.

That balance so far has translated to mid-30% growth and, like I said, 20 points of improvement margin. I described earlier that we might moderate that and dial more for growth, but that's a future business model for us to contemplate as we go forward..

That's helpful.

And when you look at larger customers, do you feel that they need some additional customization, more implementation requirements, or are you at the point where you're scaling quite well with larger customers as well?.

No, they absolutely do need – they do have requirements that are different from SMBs, and some of this we've been highlighting. So for example, many if not most of those do require integrations with other aspects of their IT. They are interested in custom reports, custom workflows, custom controls.

We are continuing to expand and evolve our RingCentral Connect Platform. We believe it's unique in the industry to have an open platform for the communications system. So probably most of our up-market customers are taking advantage of that now. As far as product services are concerned, yes, also we're seeing more and more of that.

And we are offering it to our enterprise accounts. And frankly, they expect it, just like the product services from Salesforce. So, similar demand here. So we are definitely giving up to – or helping them adopt and continue to do so in addressing all their needs as they would expect from a top-tier vendor..

Our next question comes from the line of James Faucette from Morgan Stanley. Please proceed with your question..

Thanks very much. I had a couple of questions. They're largely maybe follow-up to previous ones. But first, can you talk a little bit about the size and types of call centers where you're expecting where you're starting to see initial traction and response to that product.

Are these outgoing call centers or customer care centers, just a little more color on the types of market that you're finding success there? And then back on the customer acquisition effort and sales and marketing efforts, how should we think about the objectives from a long-term perspective of being able to scale that? And what kind of – do you have some targets in mind in terms of return on investment there or dollar metrics similar to what you've outlined? And I guess maybe one idea here is, any chance that you can take the MINDBODY customer and make that part of their solution? It seems like their customer set and your customer set should overlap pretty well.

Thanks..

Sure, okay. So on the call centers, so look, the solutions that we're putting forth is based on an industry-leading cloud platform that had been known to scale into thousands of seats and is supporting both inbound and outbound call center.

So, we certainly don't feel that there are any technology barriers that we have at this point in addressing those needs. Having said that, we're not targeting outbound call centers in particular. We are really offering this integrated solution as a one-stop shop to customers with in-house call centers.

Again, this is not to say that we do not or will not have pure call center customers, but vast majority are people who are running a cloud phone system for their phone solution, as well as they would have an in-house Contact Center and that can be dozens of seats or hundreds of seats at this point..

James, on the ROIC question, I mean, look, you know it's a very large market; we're doing very well with it. Obviously, many questions have been asked today about accelerate investments or accelerate profitability and that's a challenge we have. Here is the metric, we do measure LTV to CAC and a number of other things intrinsically.

But the metric we provide, I think, is the best metric for ROIC where every $1 of sales and marketing we invest gets us $8 of lifetime revenue and $5 of lifetime profit which when you translate it, it is translated to 20%, 30% of more operating profits in year three or thereafter.

So that's the symmetric we've consistently managed by since IPO and the opportunity is still there and we still manage into that. So that's the best metric I think we can provide to you from a near-term history and even on a going forward basis..

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

Hi, great. Thank you. There is not much left to ask. I guess, I just had a question related to – you mentioned that now 25% of Office bookings – RingCentral Office bookings are from customers with seats of at least 50 users or greater, up from 20%, which you guys I think have been talking about for the last few quarters.

You then also mentioned that, you think you've reached an inflection point.

So can you share with us how we should think about that 25% ramping over the course of the next 12 months?.

Heather, I think it's premature for us to describe that. Maybe in the next year end call we can provide guidance 2016. Keep in mind, even in the last year we've grown revenues 35%. So even while we are growing the business 35%, you are increasing the concentration from 20%-ish or 25%-ish.

So needless to say, it's possible that would increase, but I refrain from providing any specifics till we get to 2016..

No, I'm just mentioning because you guys called out that you've reached an inflection, so maybe then you could just share with us what you did the inflection is that's going cause that number to accelerate unless I'm just reading it wrong?.

Sure, Heather. Vlad here. So what we mean by this is that, the percentage of customers – of new customers that we are getting with always 50 seats has been increasing. If you remember, we've been talking more in the 20% range up until now. So this is the first time that we're saying that it's around 25%.

But frankly, more importantly is the fact that we have continued investment and continued acceptance from larger and larger customers. And if you look at just the stream of wins and announcements we've had between Columbia and MINDBODY, just to name a few, we are qualitatively seeing better acceptance and better adoption across larger accounts.

Having said that, it's not – it's a journey. It's not an event. What we do know is that, we have closed and actually exceeded the gap between us and traditional legacy systems, which remains to be a number competition.

We have a solution which is easier to use, absolutely functional that's better, much more open, easier to use, easier to integrate, and frankly, (52:42). So we think that with all these assets we will continue to migration away from legacy and into the cloud..

We have time for one last question. Our next question comes from the line of Sterling Auty from JPMorgan. Please proceed with your question..

Thanks, guys.

I apologize for bouncing between multiple calls but why don't you give us a sense as your average new customer – the number of new customers that are above 50 seats, what is that actually doing to the churn or kind of the consistency of the renewal rate in the business? Is that starting to actually have an uplift or a positive impact?.

We've been consistently showing that our Office churn is – or let me put it another way, our Office retention is continuously better, is outpacing our overall retention just because larger customers are less likely to go out of business and also with larger companies, there is more of a lend and expand opportunity.

And I can tell you that the larger the account, the less likely the churn and more likely on a net churn basis, the more likely are we to upsell seats. Again, our number one by far driver for churn is the customer business itself terminating. Larger companies, certainly companies with over 50 employees, just don't get into that.

So we expect those trends to continue and/or both overall churn as well as Office churn as well as Office 50-plus churn to decrease new customers to increase..

Got it, thank you..

That is all the time we have for questions today. I'd like to hand it back – call back over to Clyde for closing comments..

Thanks, Doug. Thank you all for joining us for today's call. As a reminder, RingCentral will be at the Needham, Jefferies, Credit Suisse, and Raymond James events in the coming weeks. We look forward to further discussions with you then. Have a nice evening..

Ladies and gentlemen this does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines at this time and have a wonderful day..