RingCentral's (RNG) CEO Vlad Shmunis on Q4 2015 Results - Earnings Call Transcript

| About: RingCentral, Inc. (RNG)

RingCentral, Inc. (NYSE:RNG)

Q4 2015 Results Earnings Conference Call

February 4, 2016 5:00 p.m. ET


Darren Yip - Director of Investor Relations

Vlad Shmunis - Founder, Chairman and Chief Executive Officer

Clyde Hosein - Chief Financial Officer


Mike Latimore - Northland Capital

Terry Tillman - Raymond James

Bhavan Suri - William Blair

Nikolay Beliov - Bank of America

Julian Serafini - Jefferies

Nicole Hayashi - Goldman Sachs

Brian Schwartz - Oppenheimer

James Faucette - Morgan Stanley


Greetings and welcome to the RingCentral fourth 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darren Yip, Director of Investor Relations for RingCentral. Thank you, Mr. Yip. You may begin.

Darren Yip

Thank you. Good afternoon and welcome to RingCentral's fourth 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 fourth quarter 2015 along with our financial outlook for our first quarter and full-year 2016.

Some of our discussions and responses to your questions may contain forward-looking statements including statements regarding our expected financial results for the first quarter and full-year 2016, 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, our integrated partnerships, open platform, the Glip and contact center product and our global office solution, our new phone distribution model, our plans to enhance our platform, further our enterprise capabilities and expand our international reach, and 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; the 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 our filings with the Securities and Exchange Commission 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 Web site at ir.ringcentral.com to access our third quarter 2015 earnings press release and Slide presentation, 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.

Vlad Shmunis

Thank you, Darren. And welcome to everyone joining us today for our fourth quarter and full year 2015 earnings call. We had a strong fourth quarter which capped a great 2015 for RingCentral. 2015 was a solid year exhibiting a combination of consistent top line growth on the larger revenue base, consistent execution across all our major initiatives combined with meaningful margin expansion, culminating in the company reaching profitability on a non-GAAP basis one quarter ahead of guidance.

2015 has been a watershed year for us on multiple fronts, including beating and raising projections every quarter. Successfully launching two new major carriers. Successfully completing our third acquisition as a public company and being selected by Gartner as the UCaaS Magic Quadrant leader. We have also grown the team substantially. Moved our headquarters into a new campus and established a new East Coast location in Charlotte, North Carolina. I want to thank all of our employees, customers and partners, for making this an outstanding year for RingCentral.

In 2015 we continued our disruption of the legacy on premise system provider in the still largely underpenetrated $50 billion global market. We extended our market leadership by organically growing at a clip of 35% year-over-year to nearly $300 million. Very importantly, we grew across all our market segments and product lines with our office product, a quarter billion dollar recurrent revenue business in its own right, leading the charge with over 45% year-over-year growth.

Our leading market position and growth is first and foremost rooted in our strong commitment to innovation. We extended the RingCentral platform by adding a number of core enterprise capability which now puts us on par with best in class legacy vendor from a functionality perspective while offering unsurpassed flexibility, ease of use, mobility and total cost of ownership saving. We partnered with leading SaaS contact center provider inContact and brought to market the extremely well received RingCentral contact center product.

We introduced an industry first integrated business communications and team messaging and collaboration by successfully integrating Glip, a company that we acquired earlier in the year. In 2015, we also unveiled the RingCentral Connect platform, a set of total services to build, deploy and manage custom integration using RingCentral open API. And we further leverage this by integrating with a number of leading SaaS providers including Microsoft Office 365 and Google for Work. This makes our customer's employees more productive and creates more stickiness for our product.

2015 was a breakout year for us in our expansion of market exemplified by enterprise wins at Columbia University, Medallia and Tecta, amongst others. Nearly 30% of the RingCentral Office new bookings came from up market customers with at least 50 users and meaningful up tick from about 20% in the year ago period. We now have solid proof points that our product is ready for enterprise customers and we expect continued outperformance in the segment in 2016 and beyond.

We also saw very strong growth in our indirect channel. We now have over 2500 value added resellers, up from about 1000 two years ago, while also growing carrier partnerships to three with addition of BT and TELUS adding further international reach in the process. Last but not least, we reached our first non-GAAP operating profit a quarter earlier than anticipated. We did this without tempering our industry-leading growth rate or rate of innovation. Q4 was a strong finish to the year. Our software subscription revenue grew 36% year-over-year.

This result was driven by the strength of our RingCentral Office business which grew 45% year-over-year and represents over 90% of our net new bookings. In Q4 and for the whole year, we saw broad-based strength in all segments. SMB continues to be a strong growth sector for us, growing at 35% year-over-year. We continue viewing this as a largely untapped opportunity with compelling unit economics. On the up market side, i.e. customers with 50 users or more, Q4 was a record booking quarter with our exit growth over 100% year-over-year yet again. Strong performance with customers of all sizes is what enabled us to deliver our industry-leading growth.

Last quarter I discussed four key drivers that we are focusing on to position us for strong growth in the future. These include, technology leadership, expansion up market, international reach and strong execution with our service provider and general partner. In the fourth quarter we continued to see good progress in all of these areas. Starting with technology leadership. RingCentral strives to leverage innovation to differentiate itself from the competition. In Q4 we delivered integrated Glip team messaging and collaboration as part of RingCentral Office. With this integration, we have made our key product more attractive to larger enterprise customers and prospects.

We have seen the usage of Glip nearly double since its acquisition in June. This pace of innovation is extremely difficult, if not impossible, for the legacy on-premise providers to deliver and it further enhances our capability to disrupt that business. Just like Glip helped with Columbia University in Q3, we added some additional key deals in Q4 where Glip messaging played a critical role in the customer decision making. This includes an oil and gas engineering management company with 900 users and an online media and client services company with 600 users.

We also extended our Oracle platform to further enable integrations with leading SaaS applications and custom business workflow. We have signed with more than 1500 developers across U.S., Canada and the U.K. and enabled over 120 software integration. Third party API calls to our platform grew over 50% quarter-over-quarter in Q4. We now have integration with products across various verticals including medical, finance, recruiting, retail and construction.

For instance, in the fourth quarter we won Amalgamated Bank as a customer, initially deploying over 400 users in its New York headquarters. Our plan is to expand our footprint to the remaining 500 users in over 17 branches across the U.S. The key to winning this deal was the power of our platform in the open APIs that we provide. The key use case for our API is to embed RingCentral's call recording capability within the bank's custom workflow.

We continue to improve our integration partnerships in the fourth quarter and announced the integration of Zoho CRM, and advanced customer relationship management platform with RingCentral. The solution addresses better customer engagement and automation. We were also chosen as the top partner and process communications solution in the new recommended for Google App for Work program. Being recommended by Google as a process business communication solution is a strong testament to our shared growth to improve the way businesses get work done through the cloud.

To date, we have seen over 1000 businesses already adapt this integration. Google Apps for Work has millions of customers worldwide which opens up a tremendous opportunity for us to introduce the RingCentral solution to more workplaces.

Contact center was another new technology that was an important contributor in the quarter, helping us win several larger deals and in some cases providing incremental revenue win. For example, we won a PBX replacement for 700 office users at Aptos, a spinoff from Epicor Software, a market leader in retail point of sales solutions. That subsequently was followed out with a second deal to an additional 100 contact center hits, providing a single cloud solution for all their communication needs. Aptos has also standardized all its messaging collaboration off goods after evaluating other points in messaging player. This places integrated delivery with new capabilities, it's very difficult, if not impossible, for legacy vendors to make. As you can see, this is a power of our end to end solution, integrating business communications with team messaging and collaboration and an enterprise grade SaaS contact center.

Second, we continue to see progress with our efforts to expand that market. First quarter ARR for customers with at least 50 users grew by over 100% year-over-year for the seventh consecutive quarter on a larger base. In terms of bookings mix, pipeline and deal velocity, Q4 was the best up market quarter we have seen driven by the combination of our product enhancement, sales execution as well as some Q4 seasonal effect which are especially as without a larger customer. We recently announced land and expand successes with multiple customers, including Budget Blinds, parent Home Franchise Concepts, with over 1200 locations, as well as a planned 1000 plus user expansion at Cresa, a commercial real estate services company with over 50 offices across the world. Where we are working to replace its legacy phone systems and mobilize their workforce.

RingCentral's ability to leverage initial entry wins and grow deployment across multi-thousand employee customers, is a great testament to our ability to execute on the land and expand strategy that has been key to success for many leading SaaS provider. Third, expanding our international reach is increasingly important as we expand our markets to reach global enterprises. I am very excited with our introduction earlier this week of RingCentral Global Office. A single global solution designed for multinational enterprise. Connecting workforces across multiple countries, RingCentral Global Office reduces complexity and high cost of maintaining multiple legacy, on-premise PBX systems with a single cloud solution. A recent success with Global Office was a win at Del Monte Foods which came to us to solve its global communications needs.

As part of our international effort, we have also announced a partnership with Westcon Group, a value added technology distributor of category leading solutions in security collaboration networking and data center. With a physical presence in 50 countries and the ability to deploy product globally in over 170 countries, the Westcon relationship is giving RingCentral the additional global reach it needs to meet the demands of global enterprise customers.

The fourth key growth driver I referenced last quarter, was our unmatched relationship with service providers. With AT&T, BT and TELUS, we remain the only pure play SaaS business communications company with major carriers reselling our solution. In the fourth quarter we continued to see those develop from our carrier partners. In 2015, AT&T increased its share of our total revenue to over 12% even while RingCentral as a whole grew at 35% year-over-year.

Internationally, our carrier partners investments in BT and TELUS are beginning to payoff. While it is too early, we are already seeing great customer wins from these partnership. Our BT product grew sequentially by over 50% in Q4. With TELUS, we won a deal with H&R Block Canada for a 400 plus user deal distributed across 40 locations.

Overall, we ended 2016 with tremendous momentum carrying us into 2016. Let me highlight some of the plans for the upcoming year. First, we will continue expanding our enterprise capability to fuel further expansion up market. Second, we will continue integration and expansion of Glip capabilities into RingCentral Office. This will offer our enterprise customers and industry first, fully integrated business communications and in-collaboration solution with the unified mobile first user experience.

Third, we will ramp up on our platform efforts in our quest towards developing a vibrant ecosystem to get further embedded in customer business workflow. Fourth, we will continue growing our industry leading global office footprint throughout 2016 and beyond to fully address the need of multinational enterprise. Fifth, last but not least, we will continue improving profitability while maintaining our focus on growth and innovation. With all this development, 2016 is shaping up to be an exciting year and I am confident that we will continue to execute and remain at the forefront of the powerful and continuing shift in how businesses communicate worldwide.

The penetration of cloud business communication solutions by RingCentral is under 5% globally with little competition that offers all of our capabilities in a unified scale, global mobile sourced solution. We are the leading and the fastest growing pure play software in a large and under-penetrated $50 billion global market that would rightly prefer the disruption. And with new confidence in our ability to continue leading the inevitable shape of global business communication through the cloud.

Before I turn over to Clyde, I would like to reiterate that we would not be in this leadership position without a great team. As we are setting our sights on continuous strong growth off a larger revenue base across a number of assets, we have recently consolidated all of our go to market schemes under Dave Sipes, in a newly created position of Chief Revenue Office. David is a seven year RingCentral Senior Executive veteran with an exceptional record of contributions across a wide range of areas, including sales, marketing support and corporate development.

In his more recent position as EVP of Corporate Development, Dave opened our U.K. office, led our partnership with BT, championed of the acquisition of Glip and expanded our product line with the RingCentral contact center, to name a few. Dave will continue reporting to me directly and will be responsible for worldwide sales, marketing, customer care and business and corporate development. Please join me in congratulating David in his new key role. And with that I will now turn the call over to Clyde for a review of our financials and guidance.

Clyde Hosein

Thank you, Vlad and good afternoon everyone. Before I begin, I want to ask that you refer to the Slide deck on our investor relations Web site which will help summarize the key points in our call today as well as provide some supplemental information for you.

2015 was a tremendous year for RingCentral highlighted by 36% software subscription revenue growth and manifold expansion of market. All while achieving profitability for the second half. We also had a great Q4 to finish off a strong year with our second consecutive quarter of non-GAAP profitability. Accelerated revenue growth well ahead of guidance and record bookings in up market. We are seeing strong growth across both SMB and up market segments as the market moves along with the adoption curve and embraces the cloud for efficient communications.

As a testament to our business model, we continue to see attractive unit economics with each of dollar invested in sales and marketing contributing $8 of revenue and $5 of contribution margin over the projected life of an Office customer. As Vlad discussed, we have meaningfully expanded up market, the effect of which we experienced in Q4. In that quarter, we added over $6 million to our software subscription revenue which is the most we have ever added in a single quarter. This expanded our software subscription revenue to $77 million representing an organic growth rate of 26% year-over-year and up 9% sequentially from Q2.

Total revenue for the fourth quarter was $83 million, up 35% year-over-year and 9% sequentially. This was above our guidance of $80 million to $81 million. Product revenue grew to $7 million and contributed 8% of revenue in the quarter. As a reminder, we do not develop, manufacture or otherwise touch the delivery of physical phones, but provide these as a courtesy to our customers. I am happy to announce that we will now be largely exiting the direct sale of phones altogether with no change to customer experience and with positive impacts to our overall gross margin and profitability. I will discuss more about this later.

Total annualized exit monthly subscription or ARR, grew to approximately $317 million, up 34% year-over-year and 7% sequentially. The ARR for RingCentral Office grew to approximately $247 million, up 45% year-over-year and 9% sequentially. Customer satisfaction continues to be strong in Q4 with overall net monthly subscription dollar retention over 99%. Office net monthly subscription dollar retention was once again over 100% as it common for customers to adapt RingCentral Office in part of their organization and expanded 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. The Office subscription gross margins once again demonstrated leverage from our multitenant SaaS model, improving to a record 78.7% in the quarter. You should note that this included about 0.5 point of onetime benefit with our supplies in Q4 that we would not expect on an ongoing basis. Nonetheless, this marks an improvement of 220 basis points from the third quarter and 1040 basis points year-over-year.

At our IPO a couple of years ago we published a model with a target subscription margin range of 75% to 80%, at par with those of other leading SaaS companies. Since then we have improved our gross margin for 11 straight quarters and expanded 10 points in just the past two years. In Q4, we were able to deliver gross margins at the upper end of our target range. This is truly a testament to the inherent leverage on profitability in our business model and to the RingCentral team execution.

Additionally, RingCentral's expansion to mid-market and enterprise customers who tend to buy higher priced editions, resulted in higher average revenue per user as well. Product gross margin was 13% in the quarter, a 370 basis point decrease over Q4 of last year. Total gross margin which includes software subscriptions and product, was 73.3%, up from 68.3% in Q4 of last year and 71.6% in the previous quarter. Sales and marketing expenses were $36.4 million for the quarter or 44% of revenue. This was up modestly from 43% last quarter and the fourth quarter a year ago as we continue to invest in growth given our model's attractive unit economics.

R&D expenses were $13.3 million in the fourth quarter or 16% of revenue, up about a point from the last quarter, an improvement of 18% of revenue in Q4 of 2014. G&A expenses were $10.6 million in Q4 or 13% of revenue, improvement from 15% of revenues in Q4 of 2014 and flat from last quarter. We had an operating profit of above $1 million for an operating margin of 1%, which is at the high end of our guidance range. This is an improvement of over 9 points from Q4 of last year and 30 basis points from last quarter.

Non-GAAP net income improved to $0.5 million compared to a net loss of $5.6 million in Q4 of last year and breakeven last quarter. Non-GAAP net income per share was one penny, at the high end of our Q4 guidance range of breakeven, plus or minus a penny per share. Share count was $75 million fully diluted shares. On a GAAP basis, our Q4 net loss was $6.9 million or a loss of $0.10 per share. The difference between our GAAP and non-GAAP results include $6.3 million or $0.08 per share in stock-based compensation and about two pennies from the amortization of intangibles and other items, related to Glip acquisition and currency re-measurement of our balance sheet, both of which were excluded from our non-GAAP results.

We ended Q4 with cash and short-term investments of $138 million compared to $132 million at the end of Q3. Deferred revenue was $37 million as of December 31, an increase of 7% sequentially and 43% 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 invoicing. For the quarter, cash flow from operations was positive $2.9 million compared to negative $4.3 million for Q4 of last year and positive $1.8 million for Q3 of this year. We move on to the full year 2015. Our software subscription revenue grew 36% year-over-year to $271 million, driven by RingCentral Office.

Total revenue grew 35% year-over-year to $296 million. Our indirect channel partners grew with us and accounted for over 20% of our ARR in 2015. AT&T remains our largest partner. Represented over 12% of our revenue, up from 11% in 2014. Software subscription gross margin was 76.3%, up five points from last year. Total gross margin was 71.2%, up 550 basis points from last year. We substantially improved non-GAAP operating margin over 11 points from negative 15.5% in 2014 to negative 2.3% for the full year of 2015.

We also made significant improvements in cash flow from operations we move from negative $11.4 million in 2014 to positive $5.1 million in 2015. Capital expenditure in 2015 was $17 million, a roughly 6% of revenue. Before turning to 2016, I wanted to update you on some data points I have provided last year that help illustrate the traction we are experiencing with our business model today. First, we had given more longer term contracts with greater than two-thirds of new office bookings in 2015 opting for annual or multi-year agreement, up from about half in 2014.

We also continued to see an increased portion of our contracts with upfront payment, resulted in higher deferred revenue. Second, the annual gross dollar churn rate for office was about 11% in 2015 versus over 14% in 2014, a 20% improvement year-over-year. As a reminder, this follows a 20% churn improvement in 2014 to overall a great retention story over the past two years, as we provide more value to our customers and expanded our offerings to larger enterprises. In addition, for Office customers with 50 users and above, the gross churn continued to be less than half of the overall office rate.

Third, in spite of some of the concerns we hear on price compression, our direct ARPU actually went up a few percent. This is driven by two factors. One, more customers opting for premium plus edition that have more capabilities for web and video meetings. Integrations with other key cloud applications and enhanced enterprise features, and two, our expansion of market. Up market customers tend to gravitate towards the premium plus addition.

Turning to 2016. We have an entered into an agreement with Westcon Group, a global distributor of category lead and unified communications, to distribute phones to RingCentral customers. RingCentral's core strength is cloud-based communication software. This agreement allows both companies to focus on what they do best. It leverages Westcon's capabilities to configure, sell, deliver and support physical phone devices to customer. RingCentral would exit direct phone sales. For our customers who would like to buy physical phones, RingCentral will act as an agent on behalf of Westcon, referring physical phone sales to Westcon.

Responsibility for inventory, fulfillment, accounts receivable and warranty service will be with Westcon with no change to our customer experience. Once implemented, most of the sales of physical phones will be with Westcon and will no longer be in our revenue line. We will receive a commission from Westcon as a agent. This will result in slightly smaller total revenue but will be accretive to overall gross margins as there is essentially no additional cost associated with this market. This will also result in no change to operating profit.

The agreement is effective immediately and is expected to be implemented over the next few months. From a revenue recognition point of view, as we phase this in, in practice we will see less product revenue on our P&L as this is transferred to Westcon. We will replace the product revenue line on our P&L with a line called other revenue which will mainly include revenue as an agent of Westcon, professional implementation services and a small amount of product revenues coming from subsidized phones that we occasionally may offer.

In addition, in the first half of the year, as we move to this new model, there will be some residual product revenue during the intermediary period while phasing in Westcon. Altogether, on an ongoing basis, we expect the revenues in our other revenue lines to total only 3% to 5% of our total revenue. The vast majority of our revenue, over 95% will be software subscription revenue. Investors should note that this change will not have any impact on operated or net dollar profit and is actually accretive to gross and operating margin.

With this model, our P&L will align with other leading cloud software companies across revenue and gross margins. Moving to our outlook for the first quarter and full year 2016. We have historically provided guidance to total revenue, or given the change to the new model, we will be provided more line item level guidance. The summary deck on our IR Web site will help investors compare side by side what our guidance would have looked like under the old model. Under our new model, for the first quarter, we expect software subscription revenues of $77.5 million to $78.5 million or growth of about 29% to 31% year-over-year. We expect total revenue of $79.5 million to $82.5 million. We expect software subscription gross margin to be 76.5% to 77.5%. This is about 1.5 decline from last quarter. Half of this decline is due to the benefits I described earlier that we would not expect on an ongoing basis, and the other half is due to normal seasonal effects such as employee taxes and paid time off.

We expect total gross margins of 74% to 75%. We expect non-GAAP operating margin of breakeven to 0.5%. This should lead to non-GAAP earnings per share of zero, plus or minus a penny, based on $76 million weighted average fully diluted shares. For the full year 2016, we expect software subscription revenue of $337 million to $345 million or growth of about 24% to 27% year-over-year. We expect total revenue of $347 million to $357 million. We expect software subscription gross margins of 77% to 78% and total gross margins of 75% to 76%.

We expect non-GAAP operating margins of 1% to 1.5%. This should lead to non-GAAP earnings per share of 1 penny to 5 pennies based on $78 million weighted average fully diluted shares. In summary, we had a great 2015 and are positioning the company for another strong year in 2016. We are still in the early innings of penetrating a very large market. And we are excited about our opportunities ahead. With that, I will turn the call over to the operator for Q&A.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Mike Latimore from Northland Capital. Please proceed with your question.

Mike Latimore

Great quarter there. Just a clarification on the, you say the small business segment. Did you say the small business segment revenue grew 35%?

Clyde Hosein

Correct, Mike.

Mike Latimore

Okay. All right. And then in terms of the telco channel, as you look throughout this year, how are you thinking about the telco channel in terms of overall potential growth rate.

Clyde Hosein

You are talking about all our carrier partners. Right, Mike?

Mike Latimore

Right. Correct.

Clyde Hosein

Yes. We don’t break that out separately. Obviously you saw the results last year and keep in mind a couple of things, one is AT&T as a percent of revenue increased by one point. Even as the company grew revenues 35%, so you could do that math. And we just started ramping up TELUS and BT. So without giving away stuff that we are restricted by the confidentiality, you could assume that this should continue to grow.

Mike Latimore

Got it. And did the contact center business, did that grow sequentially?

Clyde Hosein

Yes, very healthy. I think the combination of contact center and a PBX, our sales team is very excited by that and we are getting very good traction.

Mike Latimore

Okay. And just last quick question on the Global Office. I know you guys have had a number of deployments where there is kind of global reach to the deployment. Can you just clarify what is different about the Global Office versus your prior global deployment?

Vlad Shmunis

Yes. Hi, Mike. So it is really the next step forward. So prior we did have a global footprint. We had customers in a large number of countries. But what the Global Office does is very important. It's really a, you know, we think an important step forward for the industry. We now enable full local presence for those countries that are included in our current Global Office footprint. So what this mean is that if you are a customer in one of those countries, say Germany, than your phone experience is the same as if you are to use a local phone service. So your caller ID is a local caller ID. People call you on a local number. You are perceived as if you are using a fully local phone while you are in that geography. And we really feel that we are pushing the envelope with this. We expect good reception by multinational enterprises.


[Operator Instructions] Our next question comes from the line of Terry Tillman from Raymond James. Please proceed with your question.

Terry Tillman

I guess with that in mind, I will limit myself to a few questions but have a ton of questions. The first question just for Vlad, kind of philosophically or strategically, as you add more value and obviously with Glip that adds that important component around messaging. Where are you now in terms of the potential monetization around products like that? As well as, what about like embedded communications? We are hearing a lot about these apps, like salesforce introduced a click to call type dynamic. And so is that relevant? So it's kind of a two part question.

Vlad Shmunis

Yes. Hi, Terry. Okay. So as far as monetization of Glip is concerned. So we are monetizing Glip. We are monetizing in both directly and indirectly. But the best way to look at it is we have major customer wins. For example last quarter, we have announced Columbia University which has chosen to go with RingCentral because of the team collaboration and messaging capabilities that Glip brings to the table. Now, clearly, they also want a full op business communication system but Glip was a bit differentiator. So we see a number of companies and especially as you are going towards up market, more into the enterprise arena, where people are interested in communicating within the company and also with our customer outside of pure voice. And that’s what Glip has to add. And another recent example, for example, we just talked about now is Aptos which is another sizable company also interested in Glip. So we expect for more of this to come. Okay. And Terry, what was the second part of the question?

Terry Tillman

Yes. Thank you. So the second part Vlad was just the idea of this platform you have and as we hear more and more in this turnaround embedded communication, we are hearing a lot of companies, particularly in areas like sales, sales ops and marketing, introduced capabilities where it's part of the workflow there as the communication dynamic, they term it as like of like click to call. What are you doing in terms of with your APIs and your platforms, to try to leverage opportunities like that or is that not a big opportunity for you all in terms of a better communication?

Vlad Shmunis

Well, as we have been talking about, I think for some time now. So we consider our platform and our open API to be an absolute differentiator and extremely important part of our strategy. And, frankly, as we look at other cloud communications providers, we just don’t see any kind of motion in that direction. So just like when we talked about Glip, it's a great enabler and a great differentiator. We have a number of companies that specifically chose RingCentral with the idea in mind to integrate whatever data and communications capabilities that we have in the system or have stored in the system, to integrate those into their custom workflow. And that, like I say, either way for us to secure and maintain larger account. I guess one recent example is Amalgamated Bank which is a sizable institution that specifically wants to integrate growth data into their custom workflows. So, yes, expect more of this to come.

Again, very similar to kind of how salesforce did things for a long time. Right. Enabling their customer with data that resided within the sales cloud.


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

Bhavan Suri

So just, first turning to looking overall on the deferred revenue line. That’s been growing really nicely and actually faster than revenue growth over here. How should we think about the deferred revenue growth into '16 and then beyond and then a quick follow up on that, which is you have been providing the 50 plus seat customer count for a metric now and it's consistently growing nicely above 100%. Can you just provide some context at how big that plus number is getting. Sort of the average number of seats within this customer base. I think that would be really helpful.

Clyde Hosein

So on deferred revenue we showed a very good growth above our overall average. That is the result of us moving up to larger customers, which is essentially the second part of your question. Because what we find is larger customers tend to sign more long-term contracts. I think about two-thirds of them sign contracts and more of them, as you would expect, as what we see with other SaaS providers like us, are prepaying. So trend wise, our intention is to continue with that trend and as you saw, growing over a 100% 50 plus. That’s the kind of customers that would do. In terms of size, Bhavan, the size is increasing. We don’t have a metric to provide to you on it but if you look at the three market segments, we have always done really, really well and continue to do really well on this SMB space. That’s still a young market that has a lot of penetration and our product has already been great there.

The mid-market inflection point, I think Vlad described a quarter or two ago, has happened and you could see just from the few examples we gave, that they have more and more, 100s of customers, companies with 100s of customer adopting that. And I think that’s going to continue to do very well. I think the adoption rate is becoming very prevalent for that group. The enterprise which we define as 1000 plus, early stages we have had a fair amount of success. We announced a few on the call today and we see around the industry that happening. That’s probably the next area of inflection point that would happen in the future. Although, you will see from time to time, a fair amount of deal. So don’t have a metric to provide to you but overall, as you can see, whether it's from the 50 plus revenues, which now represents about 30% of our overall bookings, up from 20% a year ago. But it's overall bookings, whether it's deferred revenue, all of those metrics are pointed in the direction of a larger customer size.


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

Nikolay Beliov

I wanted to dig a little bit deeper into Global Office. My first question around Global Office was, is there as technological reason or other reasons to maintain to different brands Office and Global Office. And secondly, just wanted to -- can you walk us through the pricing, looking at your Web site, the pricing looks about the same as Office, but then you have per country pricing that’s significant less than the $25 to $45 for the core modules.

Vlad Shmunis

Yes. Hi, Nikolay, Vlad here. Okay. Taking the questions in reverse order. So the way that we came up with the pricing model. So, firstly the overriding criteria was simplicity and really avoiding any type of surprises with the customers as a telephone or service. So when you look at our international pricing, so this is a in addition to the standard per seat pricing that they are getting. So those are additive. Basically what we are saying is if you are in one of those regions, then you will have to pay this much extra for, say $15 extra for more countries, for a RingCentral seat. And based on our competitive analysis we believe that this pricing will actually be disruptive in the industry. So that’s one.

As far as maintaining two brands. So, honestly, there is only one brand, and that’s RingCentral. We just feel that it's important for a multinational organization to understand that with RingCentral, we can solve their needs globally and thus the Global Office name. But really what our sales forces are trained to sell and what our marketing materials are all about, it's really about the RingCentral.

Nikolay Beliov

Got it. Thank you. My last question is around Skype for business. Are you seeing any impact from Microsoft making a bigger push in this space in the marketplace?

Vlad Shmunis

Well, we hear about that but they don’t seem to have a product ready for market at this point. So people talk about it but nothing to buy from Microsoft yet. As you know, Gartner seems to think that there is two to three year gap and [indiscernible]. So no, we are certainly continuing our growth unabated as you can tell by the result.


Our next question comes from the line of John DiFucci from Jefferies. Please proceed with your question.

Julian Serafini

Hi, this is Julian Serafini in for John DiFucci. So I want to follow up on the question on the Global Office specifically. I guess what I am trying to understand is, does global office, like impact your ability to maintain your run rate profitability. What I am getting at is, is there additional spending required for this offering. Do you need like local salesman support for geographies? I am interested in hearing your thoughts on that?

Clyde Hosein

Yes. Thank you, Julian. For the near-term, no. Most of the customers that you will see, U.S. customers that have wanted to deploy this in different country. So that’s a positive for us. We have been clear, as we invest to fill out the footprint, we will have to invest in some CapEx in other geographies to fill out the serviceability of it. But net is, our operating margins should show some moderate improvement next year as we guided to.


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

Nicole Hayashi

This is Nicole Hayashi in for Heather. My first question is for Clyde. You were just talking about Global Office and your continued expansion internationally. Could you just talk about the top countries you hope to expand further into in 2016?

Clyde Hosein

Well, this will explain a couple of things. We have already a footprint in U.S., Canada, U.K., so that will continue. What Global Office allows us to is to serve customers who have offices in, and if you go on the Web site, Nicole, you will see it includes many, many countries of service. So it's hard to predict where those countries will come up. But what it does it gives us the capability to serve customers globally in their branch offices.

Nicole Hayashi

Okay. Got you. And, I guess in terms of total CapEx, do you think that will increase then in calendar '16?

Clyde Hosein

No, I think we have encouraged people over time to dial in 5% to 8%ish of revenues and CapEx. I think that’s probably a fair reasonable rate.

Nicole Hayashi

Okay. Great. And for Vlad, Cisco also talked about their cloud PBX [inter-quarter] [ph]. Could you compare Ring's offerings to theirs as well? Thanks.

Vlad Shmunis

Yes. It's a little bit hard. We don’t see Cisco cloud in the field all that much. We don’t believe that they have a product or are frankly even trying to sell into our segment, which we span everything from very small business all the way into multiple thousands of seats. Cisco actually seems to be positioning itself above even that. Again, we don’t see them in our space and we just don’t, frankly, are unaware of them having anything that can realistically be used by a business who has, say 5000 employees. And this has to do with the packaging price, ease of administration, ease of deployment, channel that they are using. All kinds of things. Our mobile first approach really plays well for us. So, no, we don’t see them as a competitive threat at the present at this point.


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

Brian Schwartz

Vlad, I wanted to ask you two questions on the up market, on the operations and what you are seeing out there. The first question really is on the sales cycle trend. Are you seeing any compression at all in the up market sales cycle as you are gaining more up market referencability as well as in the industry analyst recognition?

Vlad Shmunis

Well, certainly seeing an improvement in market acceptance up market and you can see this in our numbers. Triple digit growth for seventh quarter in a row, kinds of speaks for itself as well. So those are all very positive signs. As far as cycle compression is concerned, that’s a harder one. We are also growing the sales team quite a bit, so we are dealing with maybe better market acceptance but also there is a dynamic that the team is fairly new, the up market team, as to grow this. But, frankly, the larger the company, the more likely they are to go through a more of a process and you know with an RFP maybe issued. So they tend to take their time. Again, what really gives us solace is the fact that we are clearly being accepted. We don’t need to explain to people why the cloud is the way to go, like we used to. And we think there is more of this to come. And look, needless to say, it really really sells a lot. That Gartner recognized our progress. Named us the leader in the UCaaS Quadrant. So the one, both most innovative as well as most likely to execute. So that all plays very nicely with our up market niche

Brian Schwartz

And the follow up question I have, maybe it's for Clyde here. I just wanted to tap into to see how you guys are felling by your implementations capacity. You have had a lot of strong momentums here. Gosh, over many quarters right now in terms of larger deals that you are signing up. And just wondering at all if you may need to step up your implementation capacity next year. I am making this assumption that given this trend, there is probably more and more larger deal opportunities that are filling up in your pipeline. Just wanted to know if that’s included in the guidance and how you guys are feeling by your implementation capacity for these larger deals?

Clyde Hosein

Brian, I think you are talking about professional services. The short answer is, yes. We will see more for the reasons we described, which is larger customers tend to want them. Fundamentally, RingCentral could work without it but as we transition from some of the on-premise PBX and the like, they want turnkey solution. So we see more and more of that. And next year we would expect to see more. The team is building a reasonable basis. Our guidance does contemplate some increase in this but, yes, we are ramping up that team.


We have time for one last question. Our last question comes from the line of James Faucette from Morgan Stanley. Please proceed with your question.

James Faucette

Most of my questions have been answered but just two quick ones there to wrap. First, you mentioned on the sales cycle on up market. Can you talk about if there has been any change in sales in your historical markets in that process? Just wondering on the period you are seeing better close rates or any changes in close rates for the same. Secondly, when you talk about kind of the land and expand opportunities, specifically looking at expand. Is that expansion typically coming from increased seats or up sell of existing seats and how does that kind of cause this to change over time. Thank you very much.

Vlad Shmunis

Yes, James, Vlad here. Again, taking in reserve order. Land and expand, I would say has more to do with additional seats which tend to come in either in a trial situation and then once the customer gets comfortable, expand through the organization. Or not uncommon for us, to convene into a situation where we would get a region or maybe a number of locations and then just expand across the footprint. So that’s continuing. Now as far as our, what you said traditional business, I think you meant the core business. Core business, every business we are in is core and it certainly includes the up market. But if we are talking about smaller customers, look you are seeing improved profitability across the board and some of it is margin related and some of it is not. So we are being, ask for more efficient with our marketing dollar, or I should say sales and marketing dollar, as we have ever been. Our ratios that we keep on closing of $8 of revenue and $5 of profit, that continues to hold. So we are certainly not seeing any degradation there. And I would say we are generally improving our situation as a company across the board, which, again includes the go to market.


That concludes our Q&A session for today. I would like to hand the call back over to management for closing comments.

Clyde Hosein

Thank you very much for joining us today. We appreciate the interest that you have expressed in RingCentral. We will be seeing you at several conferences in the next couple of months. Thank you very much.


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

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