Greetings, and welcome to the RingCentral First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Ryan Goodman, Head of Investor Relations for RingCentral. Thank you. You may begin..

Thank you. Good afternoon, and welcome to RingCentral’s First Quarter 2020 Earnings Conference Call. I am Ryan Goodman, RingCentral’s Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Anand Eswaran, President and Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Anand, and Mitesh followed by Q&A. Some of our discussions and responses to your questions will contain forward-looking statements including our second quarter and full-year 2020 financial outlook and our assumptions underlying that outlook.

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.

In particular, our business is currently being impacted by the COVID-19 pandemic.

The extent of its continued impact on our business will depend on several factors including the severity, duration and extent of the pandemic as well as the actions taken by government businesses and consumers in response to the pandemic all of which continue to evolve and remain uncertain at this time.

RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings release and in the slide deck.

I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, our GAAP to non-GAAP reconciliations, our periodic SEC reports, a webcast replay of today’s call, and to learn more about RingCentral.

For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. With that, let me turn the call over to Vlad..

Good afternoon and thank you for joining our first quarter earnings conference call. Before we begin I'd like to first take a brief moment to address the current macro environment. We are living in an unprecedented time of global uncertainty and destruction.

Our priority at RingCentral is the health and safety of our workforce and we acted quickly in transitioning to the work from home model. As a leader in unified communications as a service we believe we have a responsibility to help our communities maintain business continuity.

To that end we began offering RingCentral office for free to cases educators, healthcare providers and non-profit government entities and news media organizations. We also announced a free offer for our cloud contact center solution to those affected by COVID-19 related challenges.

We're providing our cloud communications and collaboration solutions through organizations that are working globally and tirelessly to mitigate the impact of this crisis. This offer has been well received and we now have over 4,000 such organizations now using RingCentral.

We wish our customers, partners, employees and shareholders good health and safety in days ahead. Now on to Q1 we delivered a strong first quarter with continued strength in mid-market enterprise and channel. We also recently made several key announcements.

First we introduced RingCentral video our own video and meeting solutions completing RingCentral’s differentiated message video phone or what we refer to as NVP platform. Second, we announced general availability of Avaya Cloud Office by RingCentral delivering on the promise made six months prior.

Third, yesterday we announced a new unified desktop app an entirely reimagine user experience for enterprise communications that is available both on Windows, PCs and Macs.

Key differentiator for our new desktop apps include close integration and real-time switching between message, video and sound communications as well as switching of meetings between devices. And today, we are happy to announce that Phil Sorgen has joined us as the Chief Revenue Officer, reporting to our President and COO, Anand Eswaran.

Most recentlyPhil was the Corporate Vice President for the year, enterprise business at Microsoft. We’ll discuss on these key announcements later. As to our financial performance, revenue and non-GAAP EPS exceeded our guidance. This guidance continued to be midmarket enterprise in China.

We continue to see strong contributions from our vertical market initiatives focused on education, financial services and healthcare. These initiatives yielded good results including and over 15,000 seat win with Cornell University and over 8,000 feet wins with a Fortune 500 insurance provider and multiple accelerated healthcare wins.

Key metrics for Q1 were growing across the board. Total revenue grew to $268 million. This is a 33% increase year-over-year and is above the high end of our guidance range. Total annual recurring revenue, or ARR, surpassed $1 billion for the first time. Midmarket and enterprise continues to be a key driver of our performance.

We define midmarket and enterprise as $25,000 or more in ARR. This grew 52% year-over-year to a $524 million business. Enterprise, you find those customers with $100,000 or more in ARR with 100,000 or more in ARR grew 59% year-over-year to $318 million. General ARR grew 52% year-over-year to $329 million.

Looking forward, in this challenging macro environment, companies are facing the reality that legacy on-premise voice-only systems can no longer need modern work from any work requirement. We believe unified communication and collaboration cloud solutions are key for productive customer, partner and internal interaction.

We believe RingCentral is uniquely positioned to meet the demand. We have a differentiated enterprise program, global, scalable and secure unified Message Video Phone or MVP platform.

In particular, RingCentral provides cloud-based enterprise class global PBX capabilities seamlessly integrated with comprehensive native team messaging and video meeting capabilities.

With the recent introduction of native RingCentral Video or RCV capabilities, RingCentral customers are now through the state wholly engaged and productive from anywhere on any device and in any mode.

Very importantly, we can onboard new customers quickly and efficiently without ever having to go on-site, which is especially critical in the current environment. It has never been more clear that customers use RingCentral for a lot more than just liking up the legacy desktop phone.

As a matter of fact, we saw our app downloads increase over a 180% in April versus February with strong at usage message across all modes of communication. To that end total messages posted in April are up 70% versus February.

Total video limits in April are up over almost 200% versus February and total phone calls in April are up over 150% versus February. The triple digit growth in business voice is the last two months makes it abundantly clear, the business voice is as important as ever. We've also been very pleased with the uptake of RCV video or RCV capability.

We're seeing rapid adoption of our RCV and now we have over a 1,000 organizations using RCV as their primary video meeting solution and this number is growing very rapidly. We are also excited to see our strategic partners embrace ICV in their UCaaS offering. This includes AT&T with [indiscernible] and Avaya with Avaya Cloud Office by RingCentral.

As I mentioned we launched a viral cloud office central or ACO on March 31 delivering on the promise made nearly six months ago. At launch, Avaya has signed a number of leading master agents to sell ACO including Germany, Stanford, Avant Communication, Phoenix and Polaris.

And today we have on-boarded over 1,700 channel partner agents with only about one month since the launch it's too early but market reception is engaging. COVID-19 has put an additional spotlight on the limitation of legacy on-premise communications systems.

Longer term we believe that work from anywhere and in particular work from home will continue to be a key requirement for businesses worldwide. The business communications solutions that enable work from anywhere are now more critical than ever.

RingCentral has always been at the forefront for enabling people to work from anywhere, use any device and communicate in any mode.

With this backdrop and given our recent focus with the differentiated entity platform that saw a mission critical need for many businesses, we’re confident that in the long-term cloud will continue winning and RingCentral will continue winning through the cloud.

Now for some additional color on Q1, I will turn the call over to our President and Chief Operating Officer, Anand Eswaran..

Thank you, Vlad. Good afternoon everyone. I would like to start by extending my wishes for the good health and safety to you, to your families, friends and colleagues. I will begin with an update on how we are managing the business in this COVID-19 environment.

Then I'll provide some examples of how we are empowering our customers to succeed in these unprecedented times. But first I wanted to welcome our new Chief Revenue Officer Phil Sorgen, who started this week. As Vlad shared Phil is a 24-year Microsoft veteran and most recently was the Corporate Vice President for the US Enterprise Commercial business.

Prior to that Phil was the Global Channel Chief harnessing the power of all partners to drive growth for Microsoft. Phil also lead US small and medium businesses and served as a President of Microsoft Canada in earlier roles at Microsoft. We are excited to have Phil join us.

Phil brings 30 years of experience in leading sales and partner organizations at global scale and is going to have an immediate and lasting impact. Starting the second week of March we had efficiently transition the working from home across most of our global locations.

This transition went smoothly as we have always used our cloud communications platform for customer, partner and internal communications. Our employees have maintained their high productivity and enabled us to close the quarter on a strong note.

Thank you to for the RingCentral family for the resilience and commitment you demonstrate every day towards our company, our partners and our customers in these difficult times. In Q1 we were privileged to have helped many of our existing and new customers transition effectively to work from home while remaining productive in these challenging times.

We saw new customers come on board to the RingCentral platform in key verticals like education, healthcare, financial services.

We saw existing customers accelerate deployment and leverage more elements of our platform and portfolio and we saw customers take advantage of our differentiated unified application across messaging video phone we refer to it as NVP and our global capabilities to help keep their employees safe and productive. Let me just share a few examples.

In higher education we continue our progress with top tier universities. Our most recent win was with Cornell University May be we’ll provide our MVP communication solutions to their 15,000-plus users.

In launching an initiative to modernize its legacy on-premise communication systems, Cornell required a platform that enabled complex call-handling services, emergency notifications and mobility, leveraging our deep PBS expertise and unified MVP solution, we've been able to meet these needs while also delivering meaningful PCO savings.

In healthcare, an example is in PM Pediatrics, a pediatric urgent care provider. In this time of elevated need, they needed to optimize resources across their 40-plus locations to better serve their patients. PM Pediatrics chose RingCentral Office to seamlessly manage demand across all of their locations.

We were able to roll this out in a matter of weeks and deliver full compliance for security and privacy requirements. Another example is an existing customer of our RingCentral Office solution we talked about in February, Aveanna Healthcare, the nation's largest provider of pediatric home care.

This customer wanted to urgently transition its 300 contact center agents to work from home in less than a week. We were able to deploy our Contact Center solution to enable these agents to work remotely.

An example of a large enterprise win with our unified communications platform is Mutual of Omaha, a Fortune 500 provider of insurance and financial services. Mutual of Omaha selected RingCentral to further enhance its communications platform and support its more than 8,000 associates, sales representatives and contractors nationwide.

We are also excited to have been selected as the new communications platform for the Detroit Lions. The Lions embraced the complete MVP solution as the first virtual NFL draft on April 23. This is a great example of a mission critical use case where the customer required a proven trusted high reliability solution.

Global organizations face even more challenges with disparate legacy on-premise systems making it difficult for their workforces to communicate effectively.

For example first point a cybersecurity provider recently selected RingCentral’s global office solution which will enable their 2,000 users to be on a global unified solution with MVP capabilities across 13 countries.

In closing it is now more evident than ever that customers need a trusted, reliable fully featured unified cloud communications platform that can meet their emerging business needs at a global scale.

We are inspired by our customer and partner success stories and are deeply thankful to them for trusting RingCentral with their mission critical communication needs. While these are trying times for everyone we are extremely optimistic about our future. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv..

Thanks, Anand and good afternoon, everyone. I'll begin with a few highlights of Q1 results. I’ll then spend some time addressing how COVID-19 is shaping our business and wrap-up with how that translates into our 2020 outlook. 2020 outlook. Q1 was a solid quarter on multiple fronts. And we exceeded guidance and consensus across the board.

We surpassed a $1 billion ARR growing at 33% and saw strong momentum in mid-market enterprise ARR with over 50% growth and we successfully raised a $1 billion convertible note at 0% coupon strengthening our balance sheet. We used a portion of the cash raised to repurchase about 38% of our prior notes.

Operating and free cash flow includes a non-recurring outflow of approximately $14 million of imputed interest on the repurchase notes. Excluding this, our free cash flow margin would have been approximately 5%.

To provide better clarity into cash flow generated by core business activities, we've introduced a non-GAAP free cash flow metric in our press release that excludes this allocation. We exited the quarter with $762 million worth of cash. Now, I'd like to take a few minutes to address how COVID-19 is shaping our business.

We continue to receive strong new logo momentum across the board as companies seek to enable employees to communicate effectively in the current work-from-home environment.

In our large upmarket customers, COVID-19 has served as a catalyst for some of our existing customers to accelerate adoption of RingCentral across their footprint and use our product across all modes, messaging, video and phone. Unsurprisingly, small businesses in some verticals like retail, travel and hospitality are seeing elevated churn.

We would expect some variability in this area as long as the economic impact of COVID persist. Small businesses within these verticals account for less than 10% of our overall installed base. We're also seeing some customer extend their payments. However on a positive note nearly all of them are actively using our platforms.

We are closely working with our customers to help them be successful in these difficult times. We hope that these businesses emerge even stronger and with increased loyalty towards RingCentral. Moving to our phone revenue piece which has historically been about 5% of our total revenue.

Due to shelter in place we are seeing some demand push out for desktop phones. We resell desktop phones as a low margin add on to our recurring and accretive subscription business purely for our customers convenience and is not core to our strategy our long-term recurring revenue growth.

For our core platform as Vlad mentioned we have seen customers increasingly leverage the RingCentral app both on laptops as well as mobile devices with very high adoption in usage which is an indicator of long-term retention and customer lifetime value. Switching to our 2020 outlook we’ve sated in the headwinds and tailwinds mentioned above.

We’ve contemplated and stress tested various assumptions about what macro could mean for our business. We believe that in the ensuing outlook we have conservatively factored in a potential range of outcomes created by COVID-19. With that let's turn to the outlook for 2020.

Subscription revenue, we are raising our subscription revenue forecast to be between $1.0 billion to $4 billion and $1.03 billion for an annual growth rate of 25% to 26%. This reflects Q1 strength positive new logo trends in early Q2 and a proven outlook for the remainder of the year given the volatile macro environment.

We have also assumed a $5 million to $10 million FX headwinds from deterioration of international currencies versus the US dollar. Other revenue we are adjusting our other non-recurring revenue to be between $92 million and $95 million for a growth rate of 8% to 12% versus our previously implied guidance of 25% to 27% growth.

These adjustments assumes a further reduction in desktop phone demands. Incorporating our positive outlook for subscription revenue and lowered assumptions for other non-recurring revenue we expect our total revenue to be between the $1.116 billion and $1.125 billion for the annual growth of 24% to 25%.

We are reiterating our non-GAAP operating margins of 9.6% to 9.7%. We are committed to an annual target of 40 to 50 basis points of expansion and redeploying near-term savings from the travel and other discretionary items into growth and innovation. We expect non-GAAP EPS to be between $0.91 and $0.94 based on our share count of 93.5 million shares.

This includes $0.02 of headwind from versus our previous guidance from lower interest income assumptions given recent years.

We've followed a very similar framework for our Q2 outlook with subscription revenue range of between $244.5 million to $246.5 million up 26% to 27% growth and other non-recurring revenue of $15.5 million to $19.5 million, down 14% at the midpoint.

In summary, we are fortunate to operate in a market that is currently witnessing a noticeable increase in demand. RingCentral’s solutions solve the mission-critical need for businesses and that should project well for long-term customer acquisition and retention. The long-term outlook for the cloud communications market is stronger than ever.

For a market which was already growing rapidly new work-from-home requirement to provide an additional incentive, it is now more clear than ever that on-premise systems simply cannot serve the needs of the new work paradigm.

We believe that in the post COVID-19 world, many things will change and that modernization of business communications through the cloud will be among key priorities. As cloud adoption accelerates, we are focused on making sure that RingCentral continues to win in the cloud.

To that end, we are excited about the launch of our new video product to provide further differentiation to our leading UCaaS platform. We are also confident that our strategic partnerships including those with AT&T, Atos and Avaya will continue expanding our reach to millions of prospects across the globe, which bodes well for our long-term growth.

We pride ourselves in profitable growth. We are committed to our role of operating at or above the rule of 40 longer terms, which we again achieved in Q1. We have a large loyal customer base of profitable business model and a strong balance sheet, which allows us to continue to invest aggressively in product innovation and go-to market effort.

With that backdrop, we are confident in our ability to lead in the $50 billion plus UCaaS market. Finally, on behalf of RingCentral, I wish you, your team and loved ones, health and safety. With that, let me turn the call over to the operator for Q&A..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Terry Tillman with SunTrust Robinson Humphrey. Please proceed with your question..

Yeah. Thank you. Good afternoon. It's good to see the MVP performance.

Vlad or Anand, maybe my first question relates to, it's one thing to help kind of turn on the MVP capabilities but what we're looking at here with your business is particularly with the bigger enterprise customers, they've got to rethink the way they're doing business and how the workers work.

And so, it does seem like a great opportunity for systems integrators and some of the strategic partners so I'd love an update on Atos? And just maybe other conversations or opportunities you can have with other global SIs or just other partners beyond the service providers? And then, I had a follow up..

Absolutely, Terry. That's a good question. So, let me just answer that. This is Anand. Firstly, hopefully, everybody's family is safe and healthy in these surreal times. And thank you for still making the call and listening to us. So, on Atos, we are just early in our work and relationship with autos.

And you know right now we are targeting up market customers as you can imagine and we’re experiencing an enormous interest with big brands and large customers and we feel really good about our joint go-to-market strategy we are already seeing a lot of traction as you can imagine with all of these enterprise customers since we just got started the sales cycles are actually are much, much longer.

We are excited about the progress you would expect to see some of these come to fruition over the next months..

Got it. Thanks for the answer and then I just had to a follow-up you know we’d like to look at that net add for office ARR and I it was I think $66 million of strong result. Maybe you can just kind of dive deeper into the drivers of that and how we should think about the seasonality of additional ARR as we move through the year? Thank you..

Sure, Terry. Yeah. Yeah. I'll double click on the Q1 strength as you mentioned, so a couple of things Terry come to mind there are two or three things that are – that stood out for us this time. And the first one is we did see strong new logo momentum across the board.

If you take a slice of the large deals over a $1 million we did have the best Q1 ever and you know it's fascinating to see that we had this drumbeat even during the COVID period.

If you look at all the million dollar deals with it about 60% of those deals actually closed in the second half of March, which underpinned the secular shift on this new work paradigm, so that's number one. Number two deal sizes are getting larger especially in the up market segment.

Now again if you take a slice of this $1 million deals our TCV deals we saw a 30% year-over-year growth in the TCV itself. So new local momentum, deal strength and if you now layer on the product dimension which is Contact Center we did see year-over-year 2X increase in deal for Contact Center over the $1 million deal.

So I think it’s – we did – we were luck at this time to be in this secular shift market and a lot of shifts fell our way.

In terms of the seasonality I wouldn't you know I wouldn't expect any different seasonality it will be more backend loaded for us even Avaya kicking in towards Q4, we have taken a smidge conservative approach to our guidance including FX but overall sort of a more of the same..

Thank you. Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question..

Hey, guys. Thanks for taking my question. Solid – solid job given the environment.

You know maybe following-up on Terry's commentary for Anand, Anand you know Terry asked about it, but let's talk about Avaya obviously the Avaya relationship is a huge part of sort of future growth just you’ve talk about sort of traction a little bit and Vlad to do some comments but we'd love to get some more color on sort of the early traction you've seen there and anything you want to highlight given the Avaya deployment not so long ago you go about a month but we love to understand it is more color you can provide around what's happening with Avaya and the rollout there?.

Absolutely you know the first thing as we said we’ve launched the joint product on 331 actually the one thing I'd call out is the entire company globally shifted to work from home just two or three weeks before that and we’ve delivered on time exactly as we expected, so we’re pretty proud of that.

Now roughly a month and this is what probably I’ll share we’ve on boarded roughly 1,700-plus channel partners and several master agents and the early partner engagement and the customer interest and the customer feedback is actually phenomenal so we're pretty excited about that.

April trends whether its pipes or ops or leads or the conversion velocity there was a great reason to feel optimistic about where this is going in the long-term prospects. As you’ve – as you heard from us, we are confident that you’ll see – start to see ACO contributing towards the end of 2020.

But April trends make us pretty comfortable of our earlier commitments..

Got it. Got it. And a quick follow-up for Mitesh. Mitesh, if I look at the Q2 guide, it looks like it’s up 1% quarter-over- quarter. But by my calculations, I think you have a 1% or 100 bps FX headwind, so I think it’s the same as Q1 like 2% quarter-over-quarter sequential guide, so just I’d like to clarify that, if that’s correct.

And then, two, Anand talked about sort of trend, you've talked about sort of positive early trends in 2Q. How is that reflected in guidance? I'd love to understand sort of how you guys have built that into guidance? Thank you..

Sorry. Sorry. I was on mute. Sorry. Yeah, Bhavan, let me start with your second part of your question first. In terms of trends, which I mentioned, April actually was a very fast start. Our new acquisitions are up 40% in April year-over-year. And that's the fastest start to a Q2 I've seen in my eight years at RingCentral. So, that's part one.

We are seeing acceleration for upsells as well in certain cases where upmarket customers want to respond quickly in this crisis and want to make their employees more productive, so we are seeing that trend as well. Third trend is in terms of churn, we do – we are lucky to have a diversified base of customers, which no major concentration.

So, we are seeing some pockets of churn like no surprise in some of the SMB segments in challenging verticals. So, that’s sort of the puts and takes there. But relatively speaking, it's all, in a way, good news versus the current backdrop.

Now, if I project forward what's in the guide, we have assumed that the economy does not materially improve until Q4 and the work from home trend continues. So that’s one. For subscription revenue we’ve also assumed conservatism within this high risk SMB churn. So that’s part two.

And then if I need to tie it back to your first question which is your guidance or sequential question. Yes, that's correct. We do have a point of currency headwind that persists starting Q2.

So if you were to normalize Q2 and if you were to compare to our Q1 guide, yes you would see that it's almost very similar a bit of conservatism given the macro but no big change given the strength. And look I'll say that finally right, you know management team here. If the macro improves dramatically we would expect upside in second half.

That's the way I'd characterize it..

Super helpful. Thank you, guys. Thanks again for taking my questions. A nice job..

Thank you. Our next question comes from line of Mike Turrin with Wells Fargo. Please proceed with your question..

Hey there. Thanks. Good afternoon. Good to hear everyone sounds safe and well. Vlad we saw the launch of the new RingCentral video product early last month. We're impressed you've been able to keep the product roadmap moving forward in this environment.

Is there anything else you can share around what you've seen there in terms of adoption or usage so far understanding it's still early?.

Vlad, I don't know if Vlad is muted. But let me just – let me just take it as Vlad comes on. So couple of things, one is again goes back to what I said ACO which is we launched RingCentral video right in the middle of the lockdown on-feature, on-time which is something we are really proud of.

We are seeing a tremendous amount of increased usage across the board. Our total video minutes in April are up over 200% versus February broadly. But we are seeing a lot of that translate you know to the RingCentral Video product as well.

We’ve had – as you know we’ve been using RingCentral Video internally for over a year and with customers for over nine months in beta and we are seeing that translate in terms of traction with AT&T, Go Financial and just announced how they were able to move and transition their entire workforce in a matter of a couple of days over to RingCentral Video and over to actually working from home remotely.

And so that was great validation we’ve talked about worldwide vision similarly using RingCentral Video to actually continue the work they're doing from a non-profit standpoint especially in the middle of the COVID crisis.

So early feedback, early usage, early adoption in the last 30 days actually has been really good and something we are very proud of. Vlad are on you yet anything you want to….

Yeah. My apologies. No, my apologies I did the Mitesh thing, which is that gave us beautiful extremely well thought out speech on mute.

So I think your covered the highlights look I think short version is we're quite pleased not only you know the timing as being able to get it on time you know in this say difficult times, but the product holding up eaten enterprise great products by you know design in every way.

So you know we built based on our – you know well-known reliability and our well-known security and you know which we've established over the years was you know our traditional voice infrastructure. And we're seeing all of this you know translating nicely and holding up. Knock on wood, I should say, but yes but holding up in the video domain as well.

Customer feedback is positive. Analyst – industry analyst feedback is positive. And I think there is a machine press by third parties, which is rather complementary of the product. And look, what can I say? We have thousands of customers as in businesses, businesses. Many more of that in users.

We at Ring are 100% on product that's many thousand people right there. And look, it's only the beginning for us. This product level is pretty good now. It’s going to get substantially – you'll see rapid focus here which has quite a bit of effort behind it.

And just in summary, I wanted to say, I think we mentioned it in our prepared remarks, if I remember. But some NFL teams went to draft in it, talk about security and reliability and trust worthiness. And they chose us over [indiscernible] call it better-known options for those reasons.

So again, we have a bad virus which went into RCV and they will remain with RCV. It will grow up. It will continue to grow up..

That's great. Maybe one for Mitesh. That's a lot to go through there in a limited amount of time. So, I wanted to ask about what are additional growth drivers that wasn't in the prepared remarks, the AT&T partnership, any update you can be right in terms of how that's progressing I think would be helpful as well? Thanks..

Sure, Michael. Yeah. No, good one. Yeah. There is so much to go through as you said in the transcript. So yeah, AT&T, I knew it’s – it saw very good momentum again, actually. See, if you double click on couple of the drivers, we did see increase of direct and channel participation meaning more folks are reselling our AT&T product. That's one.

Meaning more focus reselling our AT&T product that’s one. That’s resulting into a higher pipe, a meaningfully higher pipe. Churn actually is improving in the base. So if you tie all these three drivers together we saw a sequential uptick again of over 20% second quarter in a row after AT&T made RingCentral our lead solution.

The overall number is still smaller in terms of the bigger picture. But I think that this – this would come – this may prove out to be a tailwind for future growth..

Great. Thanks so much. Nice start to the year here..

Thank you. Our next question comes from line of Kash Rangan with Bank of America, Merrill Lynch. Please proceed with your questions..

Hi. Thank you very much. Your CFO does such a good job, he anticipates all our questions. It’s so hard to ask a good question but I’m going to try and outfox him. So Vlad maybe a question for you or Mitesh you can share for yourself as you get on in. Congratulations, welcome to the RingCentral family..

Thank you..

As you look at the long-term beyond 2020, 2021, Vlad what are the vectors that drive RingCentral’s business and amongst those vectors what are the things that could end up being stronger than anticipated or weaker than anticipated? Thank you so much..

Maybe I can – I’ll take a start and then Vlad can of course jump in with the bigger picture. So Kash, no, you have outfoxed me here. So as usual you're asking big picture question.

So, I think we are thinking that this COVID impact could be a glass half full for us and it's more of a tailwind we think than a headwind because this was a much needed catalyst for that transition from on-premise to the cloud and near-term what could go or long-term.

And near-term what could go or long-term what could go wrong is the risks are shown from the SMB segment in some challenge industry it’s less than 10% of our installed base, but that is a definite headwind we need to acknowledge.

In terms of tailwinds the new logos we talked about right that the new demand we are seeing from these customers up like call it 40% in April these are the customers who are quickly adopting being more agile and weathering the crisis.

So long-term you know we will have a base of energized loyal customers with even higher lifetime value because they're here to stay. And then now you layer on all the commentary which Anand mentioned about AT&T – I mentioned about AT&T which is performing really well.

We have Avaya early signs are very promising it’ll start kicking into high gear in Q4. We have Atos coming on and Vlad mentioned about RCV so where we would be able to capture incremental video demand over time.

So I think you know there are multiple tailwinds going in our favor recurring revenue models it’s very predictable we are seeing some marketing efficiencies improve. So I think you know we will strive to maintain the rule of 40% that's the way at least I think about the picture financially and of course Vlad can chime in with bigger picture..

And you know if I will just add a couple of things here as I look you asked me for – you asked us for the long-term 2020, 2021 and so on.

There are you know everything Mitesh said is going to help us do what we really think drives future growth for us which is increased focus on the enterprise, 75% of the TAM is in the enterprise and that's where we are investing and that's driving a lot of our growth as Vlad said earlier on in the prepared remarks.

We were double down on partnerships something which our company is known for and we will actually expand you know the lens of partnerships. International expansion is a key thing and our focus on key verticals you know our traction in healthcare today, education today has been phenomenal.

We're going to double down on those six key verticals which further give us a spring in our step, so that’s how I look about the macro strategic elements which drive further growth..

Yeah, no, I mean, I’ll try to add to this, look obviously there are macro risks obviously unprecedented times. But for now we've been coping up, our business has been coping up and where we have demand in several times, new logos and acquisitions are accelerated. And so, at this point, I see way more tailwinds than headwinds.

As a most full year tailwind there being that on-prem traditional infrastructure is not going to hold up in work-from-home, work from anywhere.

So once you – once people realize that we should think more and more right now and working post COVID then people will go out and then and disputed for our dealer at this point, so hope we get our fair share in the demand..

Got it. Thank you very much. Great perspectives. Enjoyed it. Congratulations on the quarter..

Thank you..

Thank you. Our next question comes from line of Samad Samana with Jefferies. Please proceed with your question..

Hi.

Good evening and thanks for taking my questions the new headwinds, but as I think about customer behavior with more people working from home, if more customers are using soft phones, does that actually accelerate the ability to adopt RingCentral or how does that change the adoption dynamic for RingCentral software using a soft phone versus hard phone?.

Yeah it has been so yeah go ahead maybe I’ll that. I mean we're already seeing that it is so cell phone is always with you especially if you use a mobile version to remind people one of our key differentiators has been mobile first we've talked about mobile workforces – things you know as a public company and I can tell you -- reported well.

So yeah I mean we are just seeing a bit more engagement certainly as we mentioned that we are seeing a downward disclosure to the book mobiles we are just seeing a lot more engagement.

Certainly, as mentioned, we are seeing app downloads [indiscernible] we do just because this device is always buying and interestingly now once they are in the app this is where our MVP message voice phone capability which is well differentiated as far as time zone is we spent quite a bit of time to make sure that we can seamlessly switch between mall as well as between devices.

So we just introduced this yesterday introduced our next-gen investor plan which makes it even easier to do that.

So again we see increased usage and we project more increased usage and more engagement from the customer base and we also I would say cautiously optimistic but definitely optimistic that with more IP usage there will be a viral coming as well. Again you know people trying this product useful.

We believe its mission critical solving the mission critical needs to people and as more and more get exposed you know we think it will be another tailwind for us..

Great. That's helpful.

And then maybe just a follow-up Mitesh on the outlook for 2020 any color or any kind of double click you can do on – on what you're assuming in terms of geographies North America versus EMEA versus APAC and thanks again for taking my questions?.

Sure, Samad so APAC is very small for us. So North America is you – is more than 90% for us. Internationally we did grow faster this quarter than usual, so we are seeing some tailwinds there.

But no, no material change in the way we are modeling the outlook over time I think with the Atos and Avaya kicking in there will be some tailwinds internationally but for now we've not really modeled in any acceleration..

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question..

Yeah. Thanks. Hi, guys. Even though it's early I wonder if you could give us a sense of the demographics of the types of customers that are in the pipeline through that Avaya partnership, are they skewing to either particular industry or particular size of organization? Thanks..

This is Anand, so I'll take that. The early pipe is essentially because of the circumstances we are in is cueing to some of the verticals which we would expect to actually want to accelerate down this path which is healthcare and education.

But I’ll say that no there’s no particular patterns I would call out which are different from what we expected either in terms of segments of customers or any other patterns on, any other verticals. These are the only things, which I would say is an acceleration based on the times we are in..

Got it. And then one follow up, Mitesh.

Can you give some of the sense of what’s happening in SMB but when you look across the entire business, any sense of the representation from hard hit industries like travel, you know, hospitality et cetera?.

Yeah. It's similar. It's about, it's a little bit over 10% if you then take, extrapolate across the board but where we are seeing an impact is on the SMB side of these challenge verticals.

Our upmarket segment even though there may be some exposure, we may be, we are seeing some acceleration at the margins because these customers want to make their employees more productive and so they are pulling in some of the seats they would have normally pulled in later on..

Understood. Thank you..

Thank you, Sterling..

Thank you. Our next question comes from line of Brian Peterson with Raymond James. Please proceed with your questions..

Hi, gentlemen. Thanks for taking the question. And as a lifelong Detroit Lions fan, I'm glad to hear you're helping them out. Mitesh, maybe, maybe start with one for you. I know a lot of people pay attention to the ARR. I wanted to look at kind of the enterprise contribution there.

And if we think about some of your larger enterprise customers and enterprise component of that, how much of that is actually showing up in ARR? And what could that expansion opportunity ultimately look like?.

Interesting one. So, ARR, the larger the customer, the lower it usually represents in the end quarter ARR. So, if you look at, let's call it the top three deals this time, the top one being Corneal, less than 10% of Corneal’s deal value is showing up in our AAR. So, less than 10% of Cornell’s deal value is showing up in our ARR.

So, more future land and expand. Now if I were to expand that or the top three deals, it’s about 30% is deployed in ARR.

So I think what’s happening in the – as this – you actually get up on a key thing that as we are signing larger deals, we – there is this exhaust pipe of land and expand where the commitments go for multiple quarters and multiple years. So not everything shows up in the first quarter.

Just to wrap it up, this time 30%-ish in the top three deals showed up in ARR and more to come in the future..

And Mitesh just maybe a similar vein if we had to look at the enterprise base more broadly did you see a lot of migration on that expand path so far this year? And what would you say is the penetration into VC opportunity across your enterprise base today?.

Yeah, no. Good one again, Brian. So I think the broad strokes here is that because we are signing up such new logos at a more rapid clip, our penetration is still about 15%, 20% in the enterprise base, that business is over a $0.5 billion business now.

So, even if you don't do anything much and if you expand this installed base, within the installed base 5x, 6x, there is much more room ahead for us just to keep on accelerating just based on that..

Great color. Thanks, Mitesh..

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum Capital Group. Please proceed with your question..

Thank you.

One of the very interesting points I thought you may relate it to seeing the acceleration of clients who previously only had some of their seats with you are beginning to move fully to the cloud, I wondered if you could expand upon that as we think through your top 25 customers, for a perspective what percentage of their seats have actually moved to the cloud already?.

I don’t have that exact cut, George, for you, the Top 25, what has moved to the cloud. Let me try another way. Roughly, I would say, in the Top 20 -- deals, call it, there would be about 35% to 40% of the seats would be deployed, just broad strokes. Just so, I'm looking at some facts, I mean total data.

So, you would say, at least more than half is left to be deployed..

Okay. One other question on extending payments, you mentioned that's one of the dynamics of the COVID that we're living through.

To quote you, if you could double click one on that and explain the accounting behind it and how that will work for you in the next quarter or two from our revenue impact and a receivables impact?.

Yeah. Sure. I will double click, George. And then – and I didn't know you had an accounting minor there. So yeah – so let's start from a less aggression in two things. Let's start with the working capital, and then, we'll also start with the rev rec.

So, in terms of working capital, it's a natural impact, right, we are deferring payments and we want to help our customers, so there will be some working capital impact in Q2 in terms of higher receivables for us.

And the good news about that is we do feel very good about these customers, even though there are deferring payments because the usage is very high, like nearly all these customers are using the product, so which is good news. In terms of rev rec, right now, deferring payments does not equal no revenue.

So, as long as they would pay in the future, there will be rev rec. Having said that, we have taken a bit of a conservative approach and baked in some reserves in the revenue, assuming that some portion of these customers will not come back and will not fail. So that’s reflected in our Q1 actuals. And so we would de-risk that a little bit..

Perfect. Thank you very much..

Sure..

Thank you. Ladies and gentlemen in the interest of time we ask that you please keep to one question each. Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question..

Yes, hi. This is Karan on for Meta. Congrats on the quarter. One question we had is just a little bit more color on of your customer ads. How many took advantage of free offerings versus paid offerings? Any color there would be helpful? Thank you..

Yeah. And so our offerings which were free in light of COVID was basically geared towards the first responders, so the educators K-212 community colleges, non-profits healthcare. So we basically had in the last month about 4,000-plus organizations which took advantage of those free offers to actually get onto to our communication platform.

We added more than 50,000 users as part of that and it's rapidly expanding every single day. So that's – that's what we see right now..

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

Hi, this is Dan Church. I’ll handle for Heather Bellini. Thanks so my much for taking my question. I guess just a quick one for me.

We touched on the – you touched on earlier in terms of that the initial feedback on RCV but anything you can share with that lines to, with respect to what the take rate is from new customers and how you're thinking about converting all of the RingCentral’s customer base or a portion of RingCentral’s customer base over to the proprietary offering and how we should be thinking through any possible margin implications from that? Thank you..

Vlad you want to go..

Yeah. No. Sure. Sure. So – so the question is what basis with the new customers? So for new customers you've – it is a default setting at this point unless there are some you know there is a specific functionality gap that’s been identified.

And so for example we have not yet announced Jay or for external video rooms that’s underway but strictly specking if somebody wants a room then you know we would with the room-based product. We have not announced our webinar project yet again that’s underway, but you know so those would be the major you know exceptions at this point.

But everyone else pretty much is you know getting RCV, but there is a choice you know for people to go you know from RCV to listen to meetings which is room-based or vice versa. So we do have that flexibility.

For existing customers we are making the switch available at this point but we are not you know actively promoting it at this point but it is such that all the time we will see RCV within the central family but I would say that of RCV and that RCV is you know we are putting out we are behind that era of RCV well you know still keeping [indiscernible] for us..

Thank you. Our next question comes from Rich Valera with Needham & Co. Please proceed with your question..

Thank you.

First on ACO just want to get a sense of how the level of transition or migration tools that were in the initial version of ACO we’re meeting kind of the needs of the customers that you were seeing out there and how significant of an improvement you're expecting and kind of the second version there and how that might change the addressable market of prospective ACO customers? Thank you..

You want to take that?.

Yeah no sort of the broad migration tools basically get launched in Q3 so that will be something we expect to see. But at this point in time we’ve always worked with Avaya’s on-premise base even before the partnership and we had a very good way to actually help transition the on-premise customers onto ACO.

So that's what we're working on right now, as the formalized migration tools come out shortly..

Thank you. Our next question comes from the line of Will Power of Robert W. Baird. Please proceed with your question..

Okay great, thanks. Yeah I know again congratulations on the results, but maybe just kind of two quick follow ups both though related to enterprise. I wonder first there's been broader market concerns of questions with respect to enterprise sales cycles and whether we see it lengthening in this COVID climate.

I wonder if you can comment on what you are seeing it feels like you maybe seeming just the opposite based on what you're seeing in April and the power of the product but anything broadly within enterprise sales on that front? And then the second piece is just coming back to AT&T.

I wonder if you're seeing more urgency on the part of AT&T to push the RingCentral product in the enterprise given demand they must be seeing beyond what I think was primarily more of an SMB focus to start?.

Absolutely. So I'll take that.

So you're right as you said you know we're sort of – you know as I look across the whole lifecycle of what you would expect from a customer standpoint we're seeing an healthy increase in the leads, in the up market segment post-COVID that actually seeing that conversion of those leads to opportunities hold good at a same clip.

We’re actually seeing a slight drop in the sales cycles, you know so customers are taking the opportunity to get on to an environment in a cloud communications platform because it's so critical right now. We’re actually seeing those sales cycles marginally drop and start to close deals faster.

And so that's been good and the same thing with AT&T you know and I mean Mitesh talked about you know some of the data which he shared with AT&T they're actually seeing a massive increase in the number of sellers who are coming to the table participating in opportunities we saw almost 30% increase in the seller participation in Q1 and we are seeing a fairly significant increase in the enterprise space as we look at April trends with AT&T also.

So you're absolutely right. Slight push sales cycles slightly becoming smaller and we're seeing increased traction in the enterprise with AT&T..

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

Yeah. Hi. Thanks for taking my question. Good afternoon, it’s actually a follow-up on the earlier question just to understand some clarification. In terms of the COVID-19 response that the 4,000 organizations that the 50,000 subscribers that got RingCentral Office for free.

I'm just wondering if that offer is in perpetuity or if there's a limited duration in the program and you know these subscribers can be converted after they fall in love with your products? Thanks..

We've basically announced the offer for three months. We want to make sure that we do our bit in this time of need for the community. And so that’s – so, it’s a wait-and-watch for us to see how COVID – hopefully, we get a point as we expect that June will start to seek some recovery and opening up of the ecosystem.

Our announced offer was at three months. And we will see how it goes and make a call on whether we extended or not in June..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. And that concludes our call today. We thank you for your interest and participation. You may now disconnect your lines..