RingCentral, Inc. (NYSE:RNG) Q1 2023 Earnings Conference Call May 9, 2023 5:00 PM ET

Company Participants

Will Wong – Vice President, Investor Relations

Vlad Shmunis – Founder, Chairman and CEO

Mo Katibeh – President and COO

Sonalee Parekh – Chief Financial Officer

Conference Call Participants

Samad Samana – Jefferies

Sterling Auty – Moffett

Siti Panigrahi – Mizuho

Meta Marshall – Morgan Stanley

Ryan Koontz – Needham

Brian Peterson – Raymond James

Matt Niknam – Deutsche Bank

Peter Levine – Evercore ISI

Matt Bullock – Bank of America

Matt Stotler – William Blair

Catharine Trebnick – Rosenblatt Securities

Bobby Dee – Truist

Michael Turrin – Wells Fargo Securities

Operator

Hello. And welcome to RingCentral’s First Quarter 2023 Earnings Conference Call. Let me now please turn the call over to Will Wong, Vice President of Investor Relations.

Will Wong

Thank you. Good afternoon. And welcome to RingCentral’s first quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Mo and Sonalee, followed by Q&A. We also have a slide presentation available on our investors website that will coincide with today’s call, which you can find under the Financial Results section at ir.ringcentral.com.

Some of our discussion and responses to your questions will contain forward-looking statements regarding the company’s business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control, and are not guarantees of future performance.

Actual results may differ materially from our forward-looking statements and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as today’s earnings release.

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

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, I will turn the call over to Vlad.

Vlad Shmunis

Good afternoon and thank you for joining our first quarter earnings conference call. We had a solid start to the year. Q1 results demonstrate that our strategy of driving healthy, profitable growth is paying off.

Total revenue grew 14% to $534 million, above the high end of our guidance range and ARR grew 14% to $2.2 billion. Operating margin rose almost 700 basis points year-over-year to 17.2%. This was also above our guidance and was once again a quarterly record.

Our higher margin was driven by continued cost discipline, improved operational efficiencies and the benefits of the actions we took last year. Those actions position us to emerge stronger and more focused when the macro environment improves.

While the macro remains uncertain, we continue to be laser focused on what we can control. This includes driving continued innovation and maintaining our disciplined approach towards increasing profitability and free cash flow. Sonalee will provide more color on our profitability shortly.

You have heard me talk about trust, innovation and partnerships being the cornerstone of our success. As to trust, we achieved 99.999% availability for the 19th straight quarter. With respect to partnerships, Mo will provide more color on our progress with the channel, strategic partners and global service providers.

I will now highlight some of our key innovation accomplishments this quarter. We believe these innovations over time will increase our customer value proposition and create additional expansion opportunities within our large customer base.

These include; RingCentral for Teams 2.0, our next generation Microsoft Teams Embedded App; RingSense, our new AI platform and its first commercial application, RingSense for Sales; RingCentral for Frontline Workers, which combines new Push to Talk functionality with RingCentral Video and Messaging; and in partnership with Vodafone Business, we have released RingCentral Overlay, which enables our messaging and video collaboration capabilities on top of legacy voice services.

Let me now provide more details. First, we recently announced RingCentral for Teams 2.0. This solution brings RingCentral’s world class cloud PBX capabilities into Microsoft Teams with a fully native experience, without requiring a second application.

This means that end customers can now enjoy RingCentral’s renowned 99.999% reliability, global availability, advanced analytics, industry leading features and third-party integration capabilities entirely within Teams’ single pane of glass.

Second, RingSense. In the past, I have talked about four megatrends driving our business. These are; shift to hybrid work; ongoing adoption of mobility by businesses; increasing reliance on distributed workforces; and the desire for an integrated, cloud-based UC and CC solution from a single provider.

A fifth megatrend has now emerged that is truly revolutionary and that is AI. With RingSense, we now have the ability to inject AI capabilities across the entire RingCentral portfolio. As one of the world’s largest UCaaS providers, we are in a unique position to offer our customers powerful insights into their conversations.

With RingSense for Sales, our first offering in this portfolio, we will be able to offer sales teams features such as engagement scoring, keyword analysis and AI generated recommendations. We are currently transitioning our own sales team from a third-party conversational intelligence solution to RingSense for Sales, as well as testing it with a number of customers in closed beta.

Third is RingCentral for Frontline Workers. This powerful solution combines new push to talk capabilities with RingCentral Video and Messaging. Gartner estimates there are 2.7 billion front line workers, more than two times the number of desk-based workers.

With our solution, frontline workers across all industries can use any smart mobile device to seamlessly and efficiently connect with their front and back-office teams. It is available in beta today as either a standalone solution or as an add-on to RingCentral MVP. Mo will provide more details.

And fourth, RingCentral Overlay, which enables RingCentral messaging and video collaboration capabilities for legacy customers. This innovation, in partnership with Vodafone Business, enables hybrid workforces and serves as a stepping stone for those customers to move to our complete UCaaS communications solution in the future.

In summary, it was a solid quarter across growth, profitability and innovation. We continue to innovate, enhancing our differentiation. We are also laser focused on efficiency, which we expect will generate robust free cash flow going forward. This sets us up well for the future and is why I am so excited about the opportunity in front of us.

Now, let me turn the call over to Mo to go over the quarter in more detail.

Mo Katibeh

Thanks Vlad. We had a solid quarter, with healthy growth across the portfolio. An example of a win contributing to this healthy growth is a Fortune 500 company that purchased five thousand seats of UCaaS and five thousand seats of CCaaS. They selected RingCentral for three main reasons.

First, our ability to integrate seamlessly into Teams, providing 99.999% reliability and deep integrations into ServiceNow, Salesforce and other key aspects of their employees’ workflows.

Second, our integrated UC and CC platform. Beyond the simplicity of having a single vendor to manage, the entire organization can now use a single communications platform. This results in increased customer satisfaction and potential new revenue opportunities. For example, if no one at a local branch location picks up after a certain number of rings, the call can now be easily forwarded to its contact center.

And finally, the company is projecting to save millions of dollars by standardizing on a single platform, removing maintenance costs, shadow IT, and telco fees.

Reducing costs is a key value proposition for all of our customers, especially in today’s environment. We continue to see good traction within our core business because of our ability to help customers save money.

Forrester, a third-party research firm, recently published a new report on the total economic impact of using RingCentral MVP and Contact Center together. This report concluded that customers are seeing a 211% return on investment, with an average payback of under six months.

In addition, Forrester concluded that using RingCentral UCaaS and CCaaS together had three key benefits. First, call handling time was reduced by 45% versus 20% for a standalone contact center. Second, internal contact center and UCaaS IT support tickets were reduced by 30%. And third, time to close each ticket was reduced by 60%.

Moving on to our Teams practice. In Q1, seats within our Teams business more than doubled year-over-year. With our updated RingCentral for Teams 2.0 solution, which is available in beta today and will be generally available this summer, we are able to provide an even better user experience and that’s not all.

Most Teams users are on E1 or E3 licenses, including many in key customer facing verticals such as healthcare, retail and professional services. Those customers chose RingCentral versus Teams Phone given our deep integrations, reliability and advanced feature sets, all at a very attractive price point.

For example, UKG, a leading provider of HR, payroll, and workforce management solutions, is currently using RingCentral with Microsoft Teams. We integrate seamlessly within their existing workflows, enhancing both their internal employee experience and their customer communications.

Now, let me give you an update on our go to market. First, strategic partners. Avaya just emerged from bankruptcy a few days ago and we expect their contribution to ramp in the latter part of the year. Also, Mitel continues to perform in line with expectations and closed a $1 million TCV transaction in Q1.

We are also seeing good traction with many of our GSP partners. Charter, one of our newest partners, performed well. We also launched with Vodafone Business in additional European geographies.

Lastly, our new partnership with AWS, while still in early days, is developing well and we expect to be on the AWS Marketplace later this year.

Now, Channel partners. They represent about 40% of our ARR base and continue to help us broaden our reach. The channel is an important part of our go-to-market and we continue to ensure that incentives are aligned with the value that they bring.

In fact, we recently launched our RingCentral Ignite program that enables partners to manage all go-to-market and customer lifecycle activities without RingCentral sales assistance, which in turn provides economic benefit for all parties.

Moving to international. I’d like to highlight two international deals that we closed with our partners. The first is with a European athletic retailer with over 2,000 stores. They selected a RingCentral solution to help them streamline communications across their retail stores in France.

They purchased thousands of MVP seats and also added our new front-line push to talk capabilities. This will allow store members to easily and securely communicate through voice, video or messaging with the push of a button, and all without additional hardware.

The other is a regional government body in Europe that recently selected RingCentral to provide video and messaging to more than 55 thousand users. This was a great win and demonstrated the power and value RingCentral Video and Messaging can provide a large organization on a standalone basis.

Lastly, I want to discuss the current demand environment. The macro remains consistent with the trends we have been seeing over the last few quarters. Also, sales cycles remain elevated versus last year as customer buying decisions continue to receive significant internal scrutiny and additional layers of approval.

We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts. However, win rates remain stable and lead flow remains consistently strong, demonstrating continued demand for on-prem to cloud conversion.

With that, let me turn the call over to Sonalee to discuss our financials.

Sonalee Parekh

Thanks Mo. I will provide highlights from the first quarter and then discuss our business outlook for the second quarter and full year. Subscriptions revenue of $508 million was up 16% year-over-year and above our guidance range. On a constant currency basis, subscriptions revenue rose 17% year-over-year.

ARR rose 14% versus last year to $2.2 billion. On a constant currency basis, ARR rose 15%. We continue to expect ARR growth to outpace subscription revenue growth in 2023. This is due to our enterprise business being more back half weighted.

Moving to profitability. I will be referring to non-GAAP results, unless otherwise noted. Our subscription gross margin was solid, at 81.8%. Overall ARPU was again resilient and above $30, supporting our strong gross margin.

Operating margin rose 680 basis points versus last year to 17.2%, another quarterly record. The increase was driven by efficiencies generated across the business, most notably in sales and marketing, which was down 420 basis points versus last year. Q1 demonstrated good progress on our path to driving best-in-class profitability and free cash flow commensurate with our scale.

Regarding free cash flow, we generated $54 million in Q1 2023, which includes roughly $7 million related to one-time restructuring items. The improvements to our cost of customer acquisition, collections activity, vendor management and continued focus on driving efficiencies is leading to strong free cash flow conversion and we expect continued improvement throughout the year.

Our focus on growing free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and importantly, addressing our convertible debt maturities.

Regarding our debt, our free cash flow provides us many options in terms of how we address our convertible maturities. While our two converts both carry a zero percent coupon and are not due until 2025 and 2026, still two years and three years out, respectively, they are a top priority for us and for me personally.

Based on our 2023 outlook and assuming our current capital structure, our net leverage will be less than 3 times net debt to EBITDA for the trailing twelve months ending December 31, 2023, which we expect will continue to improve. Given the deleveraging profile, we believe we have a number of attractive choices to address our outstanding convertible maturities.

Now, turning to guidance. While we outperformed our Q1 revenue outlook, we are still early in the year. Given the macro uncertainty, we are remaining prudent in our guidance. Taking this into account, for the second quarter of 2023, we expect; subscriptions revenue growth of 10% to 11%; total revenue growth of 10%; non-GAAP operating margin of 17.5%; and non-GAAP EPS of $0.74 to $0.76.

For the full year 2023, we now expect; subscriptions revenue growth of 11%, up from 10% to 11%; total revenue growth of 10% to 11%; non-GAAP operating margin of at least 18.5%, up from our prior outlook of at least 18.0%.

Based on the midpoint of our revenue guidance, we expect operating profit dollars to grow at least 65%, up from at least 60%. Non-GAAP EPS of $3.19 to $3.25, up from our prior outlook of $3.04 to $3.10.

In summary, Q1 was a solid quarter. We exceeded guidance on both top and bottomline. We continue to see healthy growth in our business despite the current macro backdrop. We believe the market opportunity, our leading and differentiated product, and a laser focus on balancing growth with increased profitability positions us well for continued success.

With that, let’s open the call for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] The first question today comes from Samad Samana with Jefferies. Please go ahead.

Samad Samana

Hi. Good afternoon. Thanks for taking my questions. Good to see the stable results. Vlad, maybe for you. I just was curious, you talked about a number of new products and increased innovation. And I am curious, how do you think about those products, do you see them as ways to expand ARPU or drive cross-sell upsell or do you see those as features that add value that will make it easier to acquire customers? Just maybe how should we think about whether there’s a direct monetization opportunity or is this a way to continue to attract more and more customers to the RingCentral platform?

Vlad Shmunis

Yeah. Hi, Samad. Great question. Look, it’s a bit of both and it depends. So, for example, when you look at RingSense, our AI or entering into the AI space, that is absolutely a growth driver is how we see it. It will be monetized separately.

I also want to point out that it is not only aimed to be an add-on to our existing customers or to RingCentral customers, in general, but we also designed it in a way that it could be a standalone product, working with other UCaaS, CCaaS, and frankly, even UC and CC solutions. It is a general purpose like that.

When you look at frontline workers with push to talk, it’s a whole separate SKU in its own right, and again, it can stand on its own or can be added to customers.

When you look at our work on overlay, that’s actually super exciting, yeah? Because this is really the first time to where we are showing clear traction in areas outside of our core PBX in the cloud.

So the whole point in overlay is to integrate with legacy on-prem providers but augment the experience — customer experience with our video and messaging, and this, we believe, will, A, it presents a separate monetizable opportunity in its own right, as well as sets up for an easier migration path for those customers once they want to go ahead and embrace the whole cloud, okay? Am I missing something, can you think or good?

So, again, a bit of both is the short answer. But having said that, look, anything we do, any value, oh, I am sorry, by far not last or the least, is our Teams work and what we call RingCentral for Teams 2.0., and look, that’s a major, major step forward.

We believe that we simply, at this point, have the best Teams integration in the market today in the universe. It’s a completely seamless experience. What we have heard from customers, loud and clear, is that they — if they have standardized on Teams, they would much prefer to operate within the Teams’ single pane of glass.

But as we all know, Teams does not really have a, call it, fully viable UCaaS solution, we do and this is a very close integration. So we feel — look, we had good Teams business before, but we were far with the market, technology-wise. This we believe will really push us and position us well ahead of competition.

Again, it will absolutely open new doors for us. So it is definitely a revenue driver moving forward, but we also believe will be — will provide stickiness to our existing Teams’ customers, because it’s just a much better experience.

Operator

The next question comes from Sterling Auty with Moffett. Please go ahead.

Sterling Auty

Yeah. Thanks. Hi, guys. I just wondered if you could go maybe one layer deeper in terms of your discussion around how you are going to handle the convertible debt, maybe you don’t want to get into too much specifics. But anything that you can give around timing and how proactive you want to be with managing it, as well as just what are some of the options that to be the most obvious for managing through? Thank you.

Sonalee Parekh

Thanks, Sterling. Hey. It’s Sonalee here and thanks for the question. As I said in my prepared remarks, this is a very specific focus for us as a management team and for me personally. So a couple of points I would make without giving too much away.

One is that we expect to generate growing free cash flow over the next several years. And you would have seen in today’s print, along with expanding operating margin by nearly 700 basis points year-over-year, we also delivered a quarterly record on free cash flow.

So free cash flow was $61 million in the quarter and that was including about $7 million of restructuring charges and we are clearly not done yet when it comes to free cash flow. Within that, we have several options to address the convert. So one is using the cash that we are generating organically, again, which will — you will see improved throughout the year.

Secondly, you may remember, last quarter, we announced a $400 million Term Loan A. That’s a delayed draw facility, which we have available to us through November of 2023 and we will be opportunistic in terms of when and if we decide to draw on that, depending on market conditions.

But with the financial profile we are driving and if you think about how rating agencies, for example, look at enterprises such as ourselves and you think about our EBITDA profile, we will have other financing options available to us.

So we will have access to more conventional debt markets, which we can tap if we so desire. Today, the coupon on the convertible debt is zero percent. That’s a CFO’s dream. So we will balance addressing the convert with other capital allocation priorities, but we will not allow the converts to go current.

Operator

The next question is from Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi

Thanks for taking my question. And definitely I just want to focus on profitability cash flow. It’s good to see that progress even on the margin expansion side, Sonalee. So I understand that you are benefiting from some of the cost cutting and the headcount reduction you did announce earlier. But could you talk about some of the other drivers and progress there and driving margin expansion and also further cash flow conversion? How sustainable is that? How should we think about for the next few quarters or years?

Sonalee Parekh

Sure, Siti. And I am just going to hit the second part of your question right off the bat. It is very sustainable, and again, I am going to repeat, there’s more to come. We are not done yet. You saw the 700 basis point improvement year-over-year this quarter.

But you also know that we raised our OP margin guidance for the full year. We are now targeting at least 18.5% operating margins and still very much exiting at at least 20% in Q4. So not only is it sustainable, it’s going to get better from here. Yes, we did take some actions at the end of last year, difficult actions that you are seeing flow through the numbers in the current quarter.

I think the profit potential of our business model at scale is really starting to shine through and we are continuing to focus on the productivity of our workforce and optimizing and driving down the cost of customer acquisition. This is something you have heard Mo and I talk about in the past and that’s an area that we are still really investing in.

Another personal example I will give you, just from the finance side around efficiency actions is in the procurement project that we are running. We had many, many manual processes from procurement to payment as you might understand for a company that scaled and grew as quickly as we did.

And at the moment, within my finance team, we are implementing a software that will automate a lot of these processes and that procurement initiative alone will be saving high single-digit millions, just that one initiative within finance.

There’s also the operating leverage inherent in the business. We are focusing on higher ROI programs. We are really prioritizing how and when where we are investing our dollars. We are actively managing the workforce.

So that includes opening up hubs in Dallas and Charlotte, which are lower cost geos versus making incremental hires in Belmont. For example, in my team, I am not making incremental hires on the finance side in Belmont. Any of those new hires would be in lower cost geos.

And then Mo will probably talk a little bit about what we are doing on the channel side. But we are very much looking at how we pay our partners and how we work with those partners and that will drive further efficiencies and incremental savings. As partners really take on a larger role in the overall soup to nuts sale process.

And then, finally, the vendor management consolidation where we are reviewing every contract, rationalizing licenses, bidding out our vendor contracts, everything to really get to best-in-class best practice.

And one last thing I will share just because you were pushing on the sustainability of this profitability and I do want to also make a strong point on free cash flow. We shared last quarter that we would double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by 2024 by fiscal year end.

I am now confident we can achieve this level of free cash flow generation much earlier than end of fiscal year 2024. And this level of free cash flow generation gives us a lot of flexibility around capital allocation, and importantly, addressing our convertible debt in a cost-efficient manner.

Operator

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall

Great. Thanks. I just wanted to see if you could kind of break down with some of the upside that you saw to the quarter that lower churn, is that better pricing on renewals, is that just slightly better that adds? It appeared kind of the mid-market was the greatest source of kind of incremental ARR growth. So just trying to see is that churn came in a little bit less than expected. Just any details on kind of that context would be helpful? Thanks.

Sonalee Parekh

Thanks, Meta. Yeah. So I think I will start off just by addressing net retention, which again is a big focus for this management team. So we produced net retention, we came in at above 100%. And within that, churn remains stable on a percentage basis, so annualized churn on a percentage basis.

What I will call out is, stable churn on a larger base does actually mean higher dollar churn, but overall churn stable and within plan. Again, we are actively focused on it. We have invested in CSM, so customer success and analytics in this area as this is a big renewal year as COVID laps.

What I would say is that, we saw some pressure in upsell due to the macro we believe and that was mostly in enterprise. So you are absolutely right to call out that SMB was a bright spot. So we saw no material change to the dynamics in that business.

And some customers within enterprise are starting to rationalize seats, given the headcount actions that they are taking internally. But we are very much focused on maintaining the logos, and again, just investing actively in that area. Mo may want to add a bit in terms of the strength we are seeing on SMB.

Mo Katibeh

Yeah. Sonalee I think you nailed it at the end of the day strength in SMB. We are seeing that market stabilize. It’s continuing to do well for us. Acquisition broadly across the Board was strong. And then, as Sonalee pointed out, stable churn and these are the factors that we have utilized as we think about our go-forward guide as well.

Operator

The next question comes from Ryan Koontz with Needham. Please go ahead.

Ryan Koontz

Thanks for the question. I wanted to ask about the Teams’ environment. I had a chance to see your 2.0 at Enterprise Connect and I was really interested in that. We have also heard anecdotally that Teams Phone are really slowing. I am sure that’s due to the macro in general. But I wonder if you are seeing any impact on that in terms of your upside opportunity to sell the turnkey Ring UCaaS solution versus opportunities to sell into Teams as your own app inside Teams. I appreciate any color on that? Thank you.

Mo Katibeh

Thanks, Ryan, and thanks for coming by and checking out the demos. Right now our — as we have said in our prepared remarks, we are seeing strong growth with our Teams 1.0 business, if you will, over 100% seat growth year-over-year.

As we think about Teams 2.0, it really is an opportunity to drive traction with what is already a fairly substantial Teams’ base through a significantly improved experience versus what we offer in our 1.0 product, and frankly, as Vlad pointed out, what other competitors in the market are offering.

And our motion there is really about targeting E1 and E3 users that don’t have a Teams Phone license and constitute the vast majority of the Teams users that are out there. And this plays directly into our BAU sales motion, if you will, where as part of the discovery process, we are talking to our customers about what solutions they are using today.

Are they on an on-prem legacy solution? Some of them may tell us that they are a Teams user and to the degree that they are a Teams user, then we pivot into offering the value and the benefits of our integrations, our analytics, all frankly, at one simple valuable price. And then to the degree that a customer needs contact center as well, CCaaS, we are able to integrate that and bring that to life.

So to simply answer your question, there’s a fairly material number of Teams users out there today. We continue to see that as a key growth opportunity for us moving forward and it only gets better with our 2.0 solution.

Operator

The next question comes from Brian Peterson with Raymond James. Please go ahead.

Brian Peterson

Congrats on the strong quarter, guys. So I just wanted to start on the enterprise in the top of funnel. I know you mentioned that ARR growth and the revenue growth in Enterprise was the delta there. What are you guys seeing in the top of the funnel that gives you confidence that, that enterprise will step up in the back half of the year? Thanks, guys.

Mo Katibeh

Thanks for the question, Brian. Appreciate it. As we think about the top of the funnel, our lead flow is still quite strong. And as I mentioned a few minutes ago, we are seeing broad acquisition strength across the Board.

The dynamic that’s in play and quite obviously driven by the macro environment, is the upsell-down-sell, two sides of the same coin are impacting our enterprise business. And so as the macro improves, our ability to sell our traditional product set into the enterprise, organically, will improve with it, one, and then two, and obviously, this takes a little bit longer.

But as you think about the new innovations that Vlad articulated, they become new cross-sell, upsell opportunities, as well as an acquisition of wedge strategy, if you will, the ability to go sell these new products as a standalone and then pull through our UCaaS and CCaaS solutions along with it. So those are the dynamics that are playing out. Thanks for the question.

Operator

The next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam

Hey, guys. Thanks for taking the question. I am just curious if you can talk about the cadence of bookings over the course of the quarter, and more specifically, I guess, was there any drop off in March or any spillover into April? And then just one quick follow-up on small business ARR, obviously, very resilient. I am just wondering if you can comment on what’s driving the relative resiliency there maybe relative to just midsize and enterprise? Thanks.

Sonalee Parekh

Sure. Hey, Matt, Sonalee here. I will take the first part of the question and then I may hand over to Mo just on — specifically on SMB. So in terms of linearity on bookings, as you know, we don’t guide specifically on bookings, but I think in the current environment, it is worth giving you some color.

I won’t speak specifically month by month, but yes, we did see much more back-end-loaded bookings. So March was the lion’s share of bookings for this quarter. And as you know, we have guided or given some color last quarter around ARR growth being higher than total revenue growth for the full year and we still expect that to be the case.

And as you know, enterprise bookings anyway tend to be more back-end loaded. So we are seeing more of that trend in the current environment. So I will hand over to Mo just on who can talk to the SMB trends.

Mo Katibeh

Yeah. So thanks for the question. As you think about the opportunity to close cycle time dynamics, we articulated that we are still continuing to see elongated cycle times vis-à-vis Q1 of last year.

Now as you think about SMB/SOHO and SMB Space, obviously, that opportunity to close is significantly faster. And one of the dynamics that played out for us during the quarter was, frankly, very good execution by our marketing organization that we have talked about historically that we were going to rationalize brand spend, we are going to improve the efficacy of our marketing demand gen motion and that is playing out.

With the less, they were able to drive more pipeline. That pipeline closes fairly quickly down market and is one of the reasons that you are seeing the strength in the numbers that we were able to put up. Thanks for the question.

Operator

The next question comes from Peter Levine with Evercore ISI. Please go ahead.

Peter Levine

Yeah. Thank you for taking my question. Yeah. Maybe Mo one for you is, you called out Avaya reemerging from bankruptcy, and I guess, you would have seen some kind of impact from the channel. Was there — I mean I guess when they were in bankruptcy, was there an impact in the first half, and then if so, can you maybe quantify what that impact was? And then maybe second, certainly, ARPU above $30 million. Can you maybe dissect what core UCaaS pricing looks like if you were to exclude contact center from that number? Thank you.

Mo Katibeh

Thanks for the question, Peter. So to talk about Avaya, look, they just emerged from bankruptcy a few days ago at the very beginning of May. As we have said before, we are expecting that their contribution will ramp in the latter part of this year, obviously, tied to putting the restructuring behind them.

We are comfortable that the contractual provisions that we have in place are going to allow us to achieve the minimum commitment volumes that we talked about last quarter, as well as the enablement of new go-to-market motions including wholesale, integrations, additional integrations that we are building tied to Avaya legacy contact center, et cetera, et cetera.

And frankly, to the degree that they are not able to achieve those commitments, if that ever happens, then we are comfortable that there’s mechanisms in place to address that as well. So, with that, Sonalee, I will turn it over to you to talk about ARPU.

Sonalee Parekh

Yeah. Thanks for the question, Peter. So as you know, we look at and run the business and disclose ARPU on a blended basis and I am happy to say that the trend was stable there. As you know, CCaaS has higher ARPU, a significantly higher ARPU than UCaaS.

But even when you take out the CCS number from overall ARPU, they are generally holding steady. There was a little bit of weakness in UCaaS relative to CCaaS, but it’s very, very mild. Overall, very stable and stable within a range. And there was some of that was actually, to be clear, some of the softness was FX, but it was very marginal.

Mo Katibeh

Yeah. Spot on. Yeah.

Sonalee Parekh

And no material change.

Operator

The next question comes from Michael Funk with Bank of America. Please go ahead.

Matt Bullock

Hi. This is Matt on for Mike. Thanks for taking the question. It’s great to hear that the demand environment is broadly holding up. Can you call out any incremental strength or weakness you saw in specific verticals this quarter?

Mo Katibeh

Yeah. Thanks Matt for the question. As we have talked about in previous quarters, the strength that we are seeing relative to verticals really ties back to areas that are very focused on what we call business to consumer, a.k.a., verticals and companies that sell or service end consumers as their customers.

So healthcare, financial services, retail, professional services, public are generally the areas that value UCaaS and the services that we provide, frankly, because voice reliability, service uptime, et cetera, has got to be rock solid, because it’s the difference between happy customers driving revenue, et cetera. Those are still the verticals that are doing really, really well for us and provide meaningful opportunity as we look ahead.

Operator

The next question comes from Matt Stotler with William Blair. Please go ahead.

Matt Stotler

Hi, everybody. Thanks for taking the question. Maybe just a follow-up and maybe this one for Mo, but it’s based on something Sonalee mentioned earlier. And so we talked about last quarter was some efficiency improvement initiatives around partners specifically and shipping incentive structures and those relationships. Just maybe give an update on the level of acceptance you are seeing with those changes at partners and then any kind of early indications on the impact on productivity of the relationships?

Mo Katibeh

Very good. Broadly, we did not see any impact year-over-year relative to our partnerships tied to the changes that we have made. As we disclosed last year, I am sorry, last quarter, ALE and Atos are no longer exclusive. We remain partners with them, they continue to have a large on-prem base and they are going to be compensated as seats are sold.

That’s generally the model that we have been targeting, that model we find drives the right incentive structure and behavior, and then broadly from our channel partners, we are continuing to see the lead flow is steady and no meaningful change quarter-over-quarter.

The only other comment that I’d make and going back to my prepared remarks is the launch of what we are calling the RingCentral Ignite program. We have had a variant out there for a while, but we are really putting some — we are behind the arrow, if you will. And what this program does is serve as another way for us to help continue driving our sales and marketing percentage of revenue in the right direction over time.

And how does it do that? One, it provides economic incentive for our partners to take on more of the sales and marketing motion themselves and not include our own direct sales base. This is a great motion, many of our channel partners have longstanding relationships with on-prem legacy customers that they are now able to go work with, move them over to RingCentral and do it without any additional incentive. This drives economic benefit for all parties, and early days, but we are seeing very solid interest from the channel partner community about this motion as well.

Operator

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Unidentified Analyst

Hi. This is Dan Cogman [ph] on for Ryan MacWilliams. Thanks for taking my question. I was just curious how your renewals fared in the first quarter maybe compared to the fourth quarter and if you have seen any changes in these customer renewals as a result of macro.

Mo Katibeh

Well, we don’t guide on renewals, but what I will bring you back to is a comment that Sonalee made, which is we are seeing the churn as a percentage is stable and doing well. As we mentioned, in the enterprise space, upsell and down-sell, frankly, two sides of the same coin. There is some pressure on the down-sell side at the renewal time frame as our enterprise customers who have been impacted themselves by the macro are doing some degree of rationalization of seats tied to their own needs. But again, broadly speaking, the churn percentage has remained stable quarter-over-quarter, year-over-year.

Operator

The next question comes from Catharine Trebnick with Rosenblatt Securities. Please go ahead.

Catharine Trebnick

Oh! Thank you for taking…

Operator

It looks like we have left our connection to Catherine. The next question comes from Terry Tillman with Truist. Please go ahead.

Bobby Dee

Great. Thanks for taking the question. This is Bobby Dee on for Terry. Just one on contact center. For those larger million-dollar-plus deals, is contact center attached still in the over 60% range or has there been any notable up or downtick in attach year-to-date? Thank you.

Mo Katibeh

Stable. We are continuing to see our $1 million-plus TCV deals have more than 60% attach of CCaaS and really this boils back to what we have seen historically, which is in the legacy UC-CC base, about 60% of all of the CC seats sold were from the same vendors that were selling UC to those customers.

It’s a very obvious buying motion. It drives significant economic benefits to customers, as I laid out in my prepared remarks, recently validated by Forrester, an independent third-party consulting company.

Operator

Today’s last question comes from Michael Turrin with Wells Fargo Securities. Please go ahead.

Michael Turrin

Hey, there. Thanks for sneaking me in. Sonalee, I just want to go back to margin. You are unlocking a lot of margin expansion in fairly quick order. You had some useful commentary around the sustainability of those improvements. Is there anything you can add around how you ensure you are driving the right level of optimization and still leaving enough in the tank for growth to hold in above double digits going forward as well, just curious on how you manage the balance through this? Thanks.

Sonalee Parekh

Yeah. Sure. I mean, you have heard us say that we are focused on driving healthy, profitable growth. So we absolutely are and always will be a growth company. What I said in previous calls and tried to reiterate today is, we are seeing the benefit of scale in the model.

We are actually seeing the profit potential of the business model starting to shine through and that’s from lots of efficiencies we found within the workforce, within optimizing our cost of customer acquisition.

And you may remember last quarter when we talked about the actions we were taking, we were very specific not to touch frontline salespeople and that is something that is still very much part of the RingCentral playbook in terms of becoming significantly more profitable and significantly more cash generative. We are protecting the P times Q selling motions within the portfolio.

And some of the things that we have talked about, Mo was talking about lowering customer acquisition within the channel, I talked about vendor consolidation, reviewing contracts, rationalizing licenses, being disciplined about expense, being disciplined about hiring in some of the G&A areas where we still have a bit of work to do, but we feel like we have come a long way.

So what I would say is that, we feel like we are getting the balance right and I very much believe that we need to invest for growth. And one of the great things about optimizing your cost base is it frees up cash to be able to invest in future and that’s what this team will be focused on.

Operator

Thank you all. And that concludes our call for today. You may now disconnect.

RingCentral, Inc. (NYSE:RNG) Q1 2023 Earnings Conference Call May 9, 2023 5:00 PM ET

Company Participants

Will Wong – Vice President, Investor Relations

Vlad Shmunis – Founder, Chairman and CEO

Mo Katibeh – President and COO

Sonalee Parekh – Chief Financial Officer

Conference Call Participants

Samad Samana – Jefferies

Sterling Auty – Moffett

Siti Panigrahi – Mizuho

Meta Marshall – Morgan Stanley

Ryan Koontz – Needham

Brian Peterson – Raymond James

Matt Niknam – Deutsche Bank

Peter Levine – Evercore ISI

Matt Bullock – Bank of America

Matt Stotler – William Blair

Catharine Trebnick – Rosenblatt Securities

Bobby Dee – Truist

Michael Turrin – Wells Fargo Securities

Operator

Hello. And welcome to RingCentral’s First Quarter 2023 Earnings Conference Call. Let me now please turn the call over to Will Wong, Vice President of Investor Relations.

Will Wong

Thank you. Good afternoon. And welcome to RingCentral’s first quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Mo and Sonalee, followed by Q&A. We also have a slide presentation available on our investors website that will coincide with today’s call, which you can find under the Financial Results section at ir.ringcentral.com.

Some of our discussion and responses to your questions will contain forward-looking statements regarding the company’s business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control, and are not guarantees of future performance.

Actual results may differ materially from our forward-looking statements and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as today’s earnings release.

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

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, I will turn the call over to Vlad.

Vlad Shmunis

Good afternoon and thank you for joining our first quarter earnings conference call. We had a solid start to the year. Q1 results demonstrate that our strategy of driving healthy, profitable growth is paying off.

Total revenue grew 14% to $534 million, above the high end of our guidance range and ARR grew 14% to $2.2 billion. Operating margin rose almost 700 basis points year-over-year to 17.2%. This was also above our guidance and was once again a quarterly record.

Our higher margin was driven by continued cost discipline, improved operational efficiencies and the benefits of the actions we took last year. Those actions position us to emerge stronger and more focused when the macro environment improves.

While the macro remains uncertain, we continue to be laser focused on what we can control. This includes driving continued innovation and maintaining our disciplined approach towards increasing profitability and free cash flow. Sonalee will provide more color on our profitability shortly.

You have heard me talk about trust, innovation and partnerships being the cornerstone of our success. As to trust, we achieved 99.999% availability for the 19th straight quarter. With respect to partnerships, Mo will provide more color on our progress with the channel, strategic partners and global service providers.

I will now highlight some of our key innovation accomplishments this quarter. We believe these innovations over time will increase our customer value proposition and create additional expansion opportunities within our large customer base.

These include; RingCentral for Teams 2.0, our next generation Microsoft Teams Embedded App; RingSense, our new AI platform and its first commercial application, RingSense for Sales; RingCentral for Frontline Workers, which combines new Push to Talk functionality with RingCentral Video and Messaging; and in partnership with Vodafone Business, we have released RingCentral Overlay, which enables our messaging and video collaboration capabilities on top of legacy voice services.

Let me now provide more details. First, we recently announced RingCentral for Teams 2.0. This solution brings RingCentral’s world class cloud PBX capabilities into Microsoft Teams with a fully native experience, without requiring a second application.

This means that end customers can now enjoy RingCentral’s renowned 99.999% reliability, global availability, advanced analytics, industry leading features and third-party integration capabilities entirely within Teams’ single pane of glass.

Second, RingSense. In the past, I have talked about four megatrends driving our business. These are; shift to hybrid work; ongoing adoption of mobility by businesses; increasing reliance on distributed workforces; and the desire for an integrated, cloud-based UC and CC solution from a single provider.

A fifth megatrend has now emerged that is truly revolutionary and that is AI. With RingSense, we now have the ability to inject AI capabilities across the entire RingCentral portfolio. As one of the world’s largest UCaaS providers, we are in a unique position to offer our customers powerful insights into their conversations.

With RingSense for Sales, our first offering in this portfolio, we will be able to offer sales teams features such as engagement scoring, keyword analysis and AI generated recommendations. We are currently transitioning our own sales team from a third-party conversational intelligence solution to RingSense for Sales, as well as testing it with a number of customers in closed beta.

Third is RingCentral for Frontline Workers. This powerful solution combines new push to talk capabilities with RingCentral Video and Messaging. Gartner estimates there are 2.7 billion front line workers, more than two times the number of desk-based workers.

With our solution, frontline workers across all industries can use any smart mobile device to seamlessly and efficiently connect with their front and back-office teams. It is available in beta today as either a standalone solution or as an add-on to RingCentral MVP. Mo will provide more details.

And fourth, RingCentral Overlay, which enables RingCentral messaging and video collaboration capabilities for legacy customers. This innovation, in partnership with Vodafone Business, enables hybrid workforces and serves as a stepping stone for those customers to move to our complete UCaaS communications solution in the future.

In summary, it was a solid quarter across growth, profitability and innovation. We continue to innovate, enhancing our differentiation. We are also laser focused on efficiency, which we expect will generate robust free cash flow going forward. This sets us up well for the future and is why I am so excited about the opportunity in front of us.

Now, let me turn the call over to Mo to go over the quarter in more detail.

Mo Katibeh

Thanks Vlad. We had a solid quarter, with healthy growth across the portfolio. An example of a win contributing to this healthy growth is a Fortune 500 company that purchased five thousand seats of UCaaS and five thousand seats of CCaaS. They selected RingCentral for three main reasons.

First, our ability to integrate seamlessly into Teams, providing 99.999% reliability and deep integrations into ServiceNow, Salesforce and other key aspects of their employees’ workflows.

Second, our integrated UC and CC platform. Beyond the simplicity of having a single vendor to manage, the entire organization can now use a single communications platform. This results in increased customer satisfaction and potential new revenue opportunities. For example, if no one at a local branch location picks up after a certain number of rings, the call can now be easily forwarded to its contact center.

And finally, the company is projecting to save millions of dollars by standardizing on a single platform, removing maintenance costs, shadow IT, and telco fees.

Reducing costs is a key value proposition for all of our customers, especially in today’s environment. We continue to see good traction within our core business because of our ability to help customers save money.

Forrester, a third-party research firm, recently published a new report on the total economic impact of using RingCentral MVP and Contact Center together. This report concluded that customers are seeing a 211% return on investment, with an average payback of under six months.

In addition, Forrester concluded that using RingCentral UCaaS and CCaaS together had three key benefits. First, call handling time was reduced by 45% versus 20% for a standalone contact center. Second, internal contact center and UCaaS IT support tickets were reduced by 30%. And third, time to close each ticket was reduced by 60%.

Moving on to our Teams practice. In Q1, seats within our Teams business more than doubled year-over-year. With our updated RingCentral for Teams 2.0 solution, which is available in beta today and will be generally available this summer, we are able to provide an even better user experience and that’s not all.

Most Teams users are on E1 or E3 licenses, including many in key customer facing verticals such as healthcare, retail and professional services. Those customers chose RingCentral versus Teams Phone given our deep integrations, reliability and advanced feature sets, all at a very attractive price point.

For example, UKG, a leading provider of HR, payroll, and workforce management solutions, is currently using RingCentral with Microsoft Teams. We integrate seamlessly within their existing workflows, enhancing both their internal employee experience and their customer communications.

Now, let me give you an update on our go to market. First, strategic partners. Avaya just emerged from bankruptcy a few days ago and we expect their contribution to ramp in the latter part of the year. Also, Mitel continues to perform in line with expectations and closed a $1 million TCV transaction in Q1.

We are also seeing good traction with many of our GSP partners. Charter, one of our newest partners, performed well. We also launched with Vodafone Business in additional European geographies.

Lastly, our new partnership with AWS, while still in early days, is developing well and we expect to be on the AWS Marketplace later this year.

Now, Channel partners. They represent about 40% of our ARR base and continue to help us broaden our reach. The channel is an important part of our go-to-market and we continue to ensure that incentives are aligned with the value that they bring.

In fact, we recently launched our RingCentral Ignite program that enables partners to manage all go-to-market and customer lifecycle activities without RingCentral sales assistance, which in turn provides economic benefit for all parties.

Moving to international. I’d like to highlight two international deals that we closed with our partners. The first is with a European athletic retailer with over 2,000 stores. They selected a RingCentral solution to help them streamline communications across their retail stores in France.

They purchased thousands of MVP seats and also added our new front-line push to talk capabilities. This will allow store members to easily and securely communicate through voice, video or messaging with the push of a button, and all without additional hardware.

The other is a regional government body in Europe that recently selected RingCentral to provide video and messaging to more than 55 thousand users. This was a great win and demonstrated the power and value RingCentral Video and Messaging can provide a large organization on a standalone basis.

Lastly, I want to discuss the current demand environment. The macro remains consistent with the trends we have been seeing over the last few quarters. Also, sales cycles remain elevated versus last year as customer buying decisions continue to receive significant internal scrutiny and additional layers of approval.

We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts. However, win rates remain stable and lead flow remains consistently strong, demonstrating continued demand for on-prem to cloud conversion.

With that, let me turn the call over to Sonalee to discuss our financials.

Sonalee Parekh

Thanks Mo. I will provide highlights from the first quarter and then discuss our business outlook for the second quarter and full year. Subscriptions revenue of $508 million was up 16% year-over-year and above our guidance range. On a constant currency basis, subscriptions revenue rose 17% year-over-year.

ARR rose 14% versus last year to $2.2 billion. On a constant currency basis, ARR rose 15%. We continue to expect ARR growth to outpace subscription revenue growth in 2023. This is due to our enterprise business being more back half weighted.

Moving to profitability. I will be referring to non-GAAP results, unless otherwise noted. Our subscription gross margin was solid, at 81.8%. Overall ARPU was again resilient and above $30, supporting our strong gross margin.

Operating margin rose 680 basis points versus last year to 17.2%, another quarterly record. The increase was driven by efficiencies generated across the business, most notably in sales and marketing, which was down 420 basis points versus last year. Q1 demonstrated good progress on our path to driving best-in-class profitability and free cash flow commensurate with our scale.

Regarding free cash flow, we generated $54 million in Q1 2023, which includes roughly $7 million related to one-time restructuring items. The improvements to our cost of customer acquisition, collections activity, vendor management and continued focus on driving efficiencies is leading to strong free cash flow conversion and we expect continued improvement throughout the year.

Our focus on growing free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and importantly, addressing our convertible debt maturities.

Regarding our debt, our free cash flow provides us many options in terms of how we address our convertible maturities. While our two converts both carry a zero percent coupon and are not due until 2025 and 2026, still two years and three years out, respectively, they are a top priority for us and for me personally.

Based on our 2023 outlook and assuming our current capital structure, our net leverage will be less than 3 times net debt to EBITDA for the trailing twelve months ending December 31, 2023, which we expect will continue to improve. Given the deleveraging profile, we believe we have a number of attractive choices to address our outstanding convertible maturities.

Now, turning to guidance. While we outperformed our Q1 revenue outlook, we are still early in the year. Given the macro uncertainty, we are remaining prudent in our guidance. Taking this into account, for the second quarter of 2023, we expect; subscriptions revenue growth of 10% to 11%; total revenue growth of 10%; non-GAAP operating margin of 17.5%; and non-GAAP EPS of $0.74 to $0.76.

For the full year 2023, we now expect; subscriptions revenue growth of 11%, up from 10% to 11%; total revenue growth of 10% to 11%; non-GAAP operating margin of at least 18.5%, up from our prior outlook of at least 18.0%.

Based on the midpoint of our revenue guidance, we expect operating profit dollars to grow at least 65%, up from at least 60%. Non-GAAP EPS of $3.19 to $3.25, up from our prior outlook of $3.04 to $3.10.

In summary, Q1 was a solid quarter. We exceeded guidance on both top and bottomline. We continue to see healthy growth in our business despite the current macro backdrop. We believe the market opportunity, our leading and differentiated product, and a laser focus on balancing growth with increased profitability positions us well for continued success.

With that, let’s open the call for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] The first question today comes from Samad Samana with Jefferies. Please go ahead.

Samad Samana

Hi. Good afternoon. Thanks for taking my questions. Good to see the stable results. Vlad, maybe for you. I just was curious, you talked about a number of new products and increased innovation. And I am curious, how do you think about those products, do you see them as ways to expand ARPU or drive cross-sell upsell or do you see those as features that add value that will make it easier to acquire customers? Just maybe how should we think about whether there’s a direct monetization opportunity or is this a way to continue to attract more and more customers to the RingCentral platform?

Vlad Shmunis

Yeah. Hi, Samad. Great question. Look, it’s a bit of both and it depends. So, for example, when you look at RingSense, our AI or entering into the AI space, that is absolutely a growth driver is how we see it. It will be monetized separately.

I also want to point out that it is not only aimed to be an add-on to our existing customers or to RingCentral customers, in general, but we also designed it in a way that it could be a standalone product, working with other UCaaS, CCaaS, and frankly, even UC and CC solutions. It is a general purpose like that.

When you look at frontline workers with push to talk, it’s a whole separate SKU in its own right, and again, it can stand on its own or can be added to customers.

When you look at our work on overlay, that’s actually super exciting, yeah? Because this is really the first time to where we are showing clear traction in areas outside of our core PBX in the cloud.

So the whole point in overlay is to integrate with legacy on-prem providers but augment the experience — customer experience with our video and messaging, and this, we believe, will, A, it presents a separate monetizable opportunity in its own right, as well as sets up for an easier migration path for those customers once they want to go ahead and embrace the whole cloud, okay? Am I missing something, can you think or good?

So, again, a bit of both is the short answer. But having said that, look, anything we do, any value, oh, I am sorry, by far not last or the least, is our Teams work and what we call RingCentral for Teams 2.0., and look, that’s a major, major step forward.

We believe that we simply, at this point, have the best Teams integration in the market today in the universe. It’s a completely seamless experience. What we have heard from customers, loud and clear, is that they — if they have standardized on Teams, they would much prefer to operate within the Teams’ single pane of glass.

But as we all know, Teams does not really have a, call it, fully viable UCaaS solution, we do and this is a very close integration. So we feel — look, we had good Teams business before, but we were far with the market, technology-wise. This we believe will really push us and position us well ahead of competition.

Again, it will absolutely open new doors for us. So it is definitely a revenue driver moving forward, but we also believe will be — will provide stickiness to our existing Teams’ customers, because it’s just a much better experience.

Operator

The next question comes from Sterling Auty with Moffett. Please go ahead.

Sterling Auty

Yeah. Thanks. Hi, guys. I just wondered if you could go maybe one layer deeper in terms of your discussion around how you are going to handle the convertible debt, maybe you don’t want to get into too much specifics. But anything that you can give around timing and how proactive you want to be with managing it, as well as just what are some of the options that to be the most obvious for managing through? Thank you.

Sonalee Parekh

Thanks, Sterling. Hey. It’s Sonalee here and thanks for the question. As I said in my prepared remarks, this is a very specific focus for us as a management team and for me personally. So a couple of points I would make without giving too much away.

One is that we expect to generate growing free cash flow over the next several years. And you would have seen in today’s print, along with expanding operating margin by nearly 700 basis points year-over-year, we also delivered a quarterly record on free cash flow.

So free cash flow was $61 million in the quarter and that was including about $7 million of restructuring charges and we are clearly not done yet when it comes to free cash flow. Within that, we have several options to address the convert. So one is using the cash that we are generating organically, again, which will — you will see improved throughout the year.

Secondly, you may remember, last quarter, we announced a $400 million Term Loan A. That’s a delayed draw facility, which we have available to us through November of 2023 and we will be opportunistic in terms of when and if we decide to draw on that, depending on market conditions.

But with the financial profile we are driving and if you think about how rating agencies, for example, look at enterprises such as ourselves and you think about our EBITDA profile, we will have other financing options available to us.

So we will have access to more conventional debt markets, which we can tap if we so desire. Today, the coupon on the convertible debt is zero percent. That’s a CFO’s dream. So we will balance addressing the convert with other capital allocation priorities, but we will not allow the converts to go current.

Operator

The next question is from Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi

Thanks for taking my question. And definitely I just want to focus on profitability cash flow. It’s good to see that progress even on the margin expansion side, Sonalee. So I understand that you are benefiting from some of the cost cutting and the headcount reduction you did announce earlier. But could you talk about some of the other drivers and progress there and driving margin expansion and also further cash flow conversion? How sustainable is that? How should we think about for the next few quarters or years?

Sonalee Parekh

Sure, Siti. And I am just going to hit the second part of your question right off the bat. It is very sustainable, and again, I am going to repeat, there’s more to come. We are not done yet. You saw the 700 basis point improvement year-over-year this quarter.

But you also know that we raised our OP margin guidance for the full year. We are now targeting at least 18.5% operating margins and still very much exiting at at least 20% in Q4. So not only is it sustainable, it’s going to get better from here. Yes, we did take some actions at the end of last year, difficult actions that you are seeing flow through the numbers in the current quarter.

I think the profit potential of our business model at scale is really starting to shine through and we are continuing to focus on the productivity of our workforce and optimizing and driving down the cost of customer acquisition. This is something you have heard Mo and I talk about in the past and that’s an area that we are still really investing in.

Another personal example I will give you, just from the finance side around efficiency actions is in the procurement project that we are running. We had many, many manual processes from procurement to payment as you might understand for a company that scaled and grew as quickly as we did.

And at the moment, within my finance team, we are implementing a software that will automate a lot of these processes and that procurement initiative alone will be saving high single-digit millions, just that one initiative within finance.

There’s also the operating leverage inherent in the business. We are focusing on higher ROI programs. We are really prioritizing how and when where we are investing our dollars. We are actively managing the workforce.

So that includes opening up hubs in Dallas and Charlotte, which are lower cost geos versus making incremental hires in Belmont. For example, in my team, I am not making incremental hires on the finance side in Belmont. Any of those new hires would be in lower cost geos.

And then Mo will probably talk a little bit about what we are doing on the channel side. But we are very much looking at how we pay our partners and how we work with those partners and that will drive further efficiencies and incremental savings. As partners really take on a larger role in the overall soup to nuts sale process.

And then, finally, the vendor management consolidation where we are reviewing every contract, rationalizing licenses, bidding out our vendor contracts, everything to really get to best-in-class best practice.

And one last thing I will share just because you were pushing on the sustainability of this profitability and I do want to also make a strong point on free cash flow. We shared last quarter that we would double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by 2024 by fiscal year end.

I am now confident we can achieve this level of free cash flow generation much earlier than end of fiscal year 2024. And this level of free cash flow generation gives us a lot of flexibility around capital allocation, and importantly, addressing our convertible debt in a cost-efficient manner.

Operator

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall

Great. Thanks. I just wanted to see if you could kind of break down with some of the upside that you saw to the quarter that lower churn, is that better pricing on renewals, is that just slightly better that adds? It appeared kind of the mid-market was the greatest source of kind of incremental ARR growth. So just trying to see is that churn came in a little bit less than expected. Just any details on kind of that context would be helpful? Thanks.

Sonalee Parekh

Thanks, Meta. Yeah. So I think I will start off just by addressing net retention, which again is a big focus for this management team. So we produced net retention, we came in at above 100%. And within that, churn remains stable on a percentage basis, so annualized churn on a percentage basis.

What I will call out is, stable churn on a larger base does actually mean higher dollar churn, but overall churn stable and within plan. Again, we are actively focused on it. We have invested in CSM, so customer success and analytics in this area as this is a big renewal year as COVID laps.

What I would say is that, we saw some pressure in upsell due to the macro we believe and that was mostly in enterprise. So you are absolutely right to call out that SMB was a bright spot. So we saw no material change to the dynamics in that business.

And some customers within enterprise are starting to rationalize seats, given the headcount actions that they are taking internally. But we are very much focused on maintaining the logos, and again, just investing actively in that area. Mo may want to add a bit in terms of the strength we are seeing on SMB.

Mo Katibeh

Yeah. Sonalee I think you nailed it at the end of the day strength in SMB. We are seeing that market stabilize. It’s continuing to do well for us. Acquisition broadly across the Board was strong. And then, as Sonalee pointed out, stable churn and these are the factors that we have utilized as we think about our go-forward guide as well.

Operator

The next question comes from Ryan Koontz with Needham. Please go ahead.

Ryan Koontz

Thanks for the question. I wanted to ask about the Teams’ environment. I had a chance to see your 2.0 at Enterprise Connect and I was really interested in that. We have also heard anecdotally that Teams Phone are really slowing. I am sure that’s due to the macro in general. But I wonder if you are seeing any impact on that in terms of your upside opportunity to sell the turnkey Ring UCaaS solution versus opportunities to sell into Teams as your own app inside Teams. I appreciate any color on that? Thank you.

Mo Katibeh

Thanks, Ryan, and thanks for coming by and checking out the demos. Right now our — as we have said in our prepared remarks, we are seeing strong growth with our Teams 1.0 business, if you will, over 100% seat growth year-over-year.

As we think about Teams 2.0, it really is an opportunity to drive traction with what is already a fairly substantial Teams’ base through a significantly improved experience versus what we offer in our 1.0 product, and frankly, as Vlad pointed out, what other competitors in the market are offering.

And our motion there is really about targeting E1 and E3 users that don’t have a Teams Phone license and constitute the vast majority of the Teams users that are out there. And this plays directly into our BAU sales motion, if you will, where as part of the discovery process, we are talking to our customers about what solutions they are using today.

Are they on an on-prem legacy solution? Some of them may tell us that they are a Teams user and to the degree that they are a Teams user, then we pivot into offering the value and the benefits of our integrations, our analytics, all frankly, at one simple valuable price. And then to the degree that a customer needs contact center as well, CCaaS, we are able to integrate that and bring that to life.

So to simply answer your question, there’s a fairly material number of Teams users out there today. We continue to see that as a key growth opportunity for us moving forward and it only gets better with our 2.0 solution.

Operator

The next question comes from Brian Peterson with Raymond James. Please go ahead.

Brian Peterson

Congrats on the strong quarter, guys. So I just wanted to start on the enterprise in the top of funnel. I know you mentioned that ARR growth and the revenue growth in Enterprise was the delta there. What are you guys seeing in the top of the funnel that gives you confidence that, that enterprise will step up in the back half of the year? Thanks, guys.

Mo Katibeh

Thanks for the question, Brian. Appreciate it. As we think about the top of the funnel, our lead flow is still quite strong. And as I mentioned a few minutes ago, we are seeing broad acquisition strength across the Board.

The dynamic that’s in play and quite obviously driven by the macro environment, is the upsell-down-sell, two sides of the same coin are impacting our enterprise business. And so as the macro improves, our ability to sell our traditional product set into the enterprise, organically, will improve with it, one, and then two, and obviously, this takes a little bit longer.

But as you think about the new innovations that Vlad articulated, they become new cross-sell, upsell opportunities, as well as an acquisition of wedge strategy, if you will, the ability to go sell these new products as a standalone and then pull through our UCaaS and CCaaS solutions along with it. So those are the dynamics that are playing out. Thanks for the question.

Operator

The next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam

Hey, guys. Thanks for taking the question. I am just curious if you can talk about the cadence of bookings over the course of the quarter, and more specifically, I guess, was there any drop off in March or any spillover into April? And then just one quick follow-up on small business ARR, obviously, very resilient. I am just wondering if you can comment on what’s driving the relative resiliency there maybe relative to just midsize and enterprise? Thanks.

Sonalee Parekh

Sure. Hey, Matt, Sonalee here. I will take the first part of the question and then I may hand over to Mo just on — specifically on SMB. So in terms of linearity on bookings, as you know, we don’t guide specifically on bookings, but I think in the current environment, it is worth giving you some color.

I won’t speak specifically month by month, but yes, we did see much more back-end-loaded bookings. So March was the lion’s share of bookings for this quarter. And as you know, we have guided or given some color last quarter around ARR growth being higher than total revenue growth for the full year and we still expect that to be the case.

And as you know, enterprise bookings anyway tend to be more back-end loaded. So we are seeing more of that trend in the current environment. So I will hand over to Mo just on who can talk to the SMB trends.

Mo Katibeh

Yeah. So thanks for the question. As you think about the opportunity to close cycle time dynamics, we articulated that we are still continuing to see elongated cycle times vis-à-vis Q1 of last year.

Now as you think about SMB/SOHO and SMB Space, obviously, that opportunity to close is significantly faster. And one of the dynamics that played out for us during the quarter was, frankly, very good execution by our marketing organization that we have talked about historically that we were going to rationalize brand spend, we are going to improve the efficacy of our marketing demand gen motion and that is playing out.

With the less, they were able to drive more pipeline. That pipeline closes fairly quickly down market and is one of the reasons that you are seeing the strength in the numbers that we were able to put up. Thanks for the question.

Operator

The next question comes from Peter Levine with Evercore ISI. Please go ahead.

Peter Levine

Yeah. Thank you for taking my question. Yeah. Maybe Mo one for you is, you called out Avaya reemerging from bankruptcy, and I guess, you would have seen some kind of impact from the channel. Was there — I mean I guess when they were in bankruptcy, was there an impact in the first half, and then if so, can you maybe quantify what that impact was? And then maybe second, certainly, ARPU above $30 million. Can you maybe dissect what core UCaaS pricing looks like if you were to exclude contact center from that number? Thank you.

Mo Katibeh

Thanks for the question, Peter. So to talk about Avaya, look, they just emerged from bankruptcy a few days ago at the very beginning of May. As we have said before, we are expecting that their contribution will ramp in the latter part of this year, obviously, tied to putting the restructuring behind them.

We are comfortable that the contractual provisions that we have in place are going to allow us to achieve the minimum commitment volumes that we talked about last quarter, as well as the enablement of new go-to-market motions including wholesale, integrations, additional integrations that we are building tied to Avaya legacy contact center, et cetera, et cetera.

And frankly, to the degree that they are not able to achieve those commitments, if that ever happens, then we are comfortable that there’s mechanisms in place to address that as well. So, with that, Sonalee, I will turn it over to you to talk about ARPU.

Sonalee Parekh

Yeah. Thanks for the question, Peter. So as you know, we look at and run the business and disclose ARPU on a blended basis and I am happy to say that the trend was stable there. As you know, CCaaS has higher ARPU, a significantly higher ARPU than UCaaS.

But even when you take out the CCS number from overall ARPU, they are generally holding steady. There was a little bit of weakness in UCaaS relative to CCaaS, but it’s very, very mild. Overall, very stable and stable within a range. And there was some of that was actually, to be clear, some of the softness was FX, but it was very marginal.

Mo Katibeh

Yeah. Spot on. Yeah.

Sonalee Parekh

And no material change.

Operator

The next question comes from Michael Funk with Bank of America. Please go ahead.

Matt Bullock

Hi. This is Matt on for Mike. Thanks for taking the question. It’s great to hear that the demand environment is broadly holding up. Can you call out any incremental strength or weakness you saw in specific verticals this quarter?

Mo Katibeh

Yeah. Thanks Matt for the question. As we have talked about in previous quarters, the strength that we are seeing relative to verticals really ties back to areas that are very focused on what we call business to consumer, a.k.a., verticals and companies that sell or service end consumers as their customers.

So healthcare, financial services, retail, professional services, public are generally the areas that value UCaaS and the services that we provide, frankly, because voice reliability, service uptime, et cetera, has got to be rock solid, because it’s the difference between happy customers driving revenue, et cetera. Those are still the verticals that are doing really, really well for us and provide meaningful opportunity as we look ahead.

Operator

The next question comes from Matt Stotler with William Blair. Please go ahead.

Matt Stotler

Hi, everybody. Thanks for taking the question. Maybe just a follow-up and maybe this one for Mo, but it’s based on something Sonalee mentioned earlier. And so we talked about last quarter was some efficiency improvement initiatives around partners specifically and shipping incentive structures and those relationships. Just maybe give an update on the level of acceptance you are seeing with those changes at partners and then any kind of early indications on the impact on productivity of the relationships?

Mo Katibeh

Very good. Broadly, we did not see any impact year-over-year relative to our partnerships tied to the changes that we have made. As we disclosed last year, I am sorry, last quarter, ALE and Atos are no longer exclusive. We remain partners with them, they continue to have a large on-prem base and they are going to be compensated as seats are sold.

That’s generally the model that we have been targeting, that model we find drives the right incentive structure and behavior, and then broadly from our channel partners, we are continuing to see the lead flow is steady and no meaningful change quarter-over-quarter.

The only other comment that I’d make and going back to my prepared remarks is the launch of what we are calling the RingCentral Ignite program. We have had a variant out there for a while, but we are really putting some — we are behind the arrow, if you will. And what this program does is serve as another way for us to help continue driving our sales and marketing percentage of revenue in the right direction over time.

And how does it do that? One, it provides economic incentive for our partners to take on more of the sales and marketing motion themselves and not include our own direct sales base. This is a great motion, many of our channel partners have longstanding relationships with on-prem legacy customers that they are now able to go work with, move them over to RingCentral and do it without any additional incentive. This drives economic benefit for all parties, and early days, but we are seeing very solid interest from the channel partner community about this motion as well.

Operator

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Unidentified Analyst

Hi. This is Dan Cogman [ph] on for Ryan MacWilliams. Thanks for taking my question. I was just curious how your renewals fared in the first quarter maybe compared to the fourth quarter and if you have seen any changes in these customer renewals as a result of macro.

Mo Katibeh

Well, we don’t guide on renewals, but what I will bring you back to is a comment that Sonalee made, which is we are seeing the churn as a percentage is stable and doing well. As we mentioned, in the enterprise space, upsell and down-sell, frankly, two sides of the same coin. There is some pressure on the down-sell side at the renewal time frame as our enterprise customers who have been impacted themselves by the macro are doing some degree of rationalization of seats tied to their own needs. But again, broadly speaking, the churn percentage has remained stable quarter-over-quarter, year-over-year.

Operator

The next question comes from Catharine Trebnick with Rosenblatt Securities. Please go ahead.

Catharine Trebnick

Oh! Thank you for taking…

Operator

It looks like we have left our connection to Catherine. The next question comes from Terry Tillman with Truist. Please go ahead.

Bobby Dee

Great. Thanks for taking the question. This is Bobby Dee on for Terry. Just one on contact center. For those larger million-dollar-plus deals, is contact center attached still in the over 60% range or has there been any notable up or downtick in attach year-to-date? Thank you.

Mo Katibeh

Stable. We are continuing to see our $1 million-plus TCV deals have more than 60% attach of CCaaS and really this boils back to what we have seen historically, which is in the legacy UC-CC base, about 60% of all of the CC seats sold were from the same vendors that were selling UC to those customers.

It’s a very obvious buying motion. It drives significant economic benefits to customers, as I laid out in my prepared remarks, recently validated by Forrester, an independent third-party consulting company.

Operator

Today’s last question comes from Michael Turrin with Wells Fargo Securities. Please go ahead.

Michael Turrin

Hey, there. Thanks for sneaking me in. Sonalee, I just want to go back to margin. You are unlocking a lot of margin expansion in fairly quick order. You had some useful commentary around the sustainability of those improvements. Is there anything you can add around how you ensure you are driving the right level of optimization and still leaving enough in the tank for growth to hold in above double digits going forward as well, just curious on how you manage the balance through this? Thanks.

Sonalee Parekh

Yeah. Sure. I mean, you have heard us say that we are focused on driving healthy, profitable growth. So we absolutely are and always will be a growth company. What I said in previous calls and tried to reiterate today is, we are seeing the benefit of scale in the model.

We are actually seeing the profit potential of the business model starting to shine through and that’s from lots of efficiencies we found within the workforce, within optimizing our cost of customer acquisition.

And you may remember last quarter when we talked about the actions we were taking, we were very specific not to touch frontline salespeople and that is something that is still very much part of the RingCentral playbook in terms of becoming significantly more profitable and significantly more cash generative. We are protecting the P times Q selling motions within the portfolio.

And some of the things that we have talked about, Mo was talking about lowering customer acquisition within the channel, I talked about vendor consolidation, reviewing contracts, rationalizing licenses, being disciplined about expense, being disciplined about hiring in some of the G&A areas where we still have a bit of work to do, but we feel like we have come a long way.

So what I would say is that, we feel like we are getting the balance right and I very much believe that we need to invest for growth. And one of the great things about optimizing your cost base is it frees up cash to be able to invest in future and that’s what this team will be focused on.

Operator

Thank you all. And that concludes our call for today. You may now disconnect.

RingCentral, Inc. (NYSE:RNG) Q1 2023 Earnings Conference Call May 9, 2023 5:00 PM ET

Company Participants

Will Wong – Vice President, Investor Relations

Vlad Shmunis – Founder, Chairman and CEO

Mo Katibeh – President and COO

Sonalee Parekh – Chief Financial Officer

Conference Call Participants

Samad Samana – Jefferies

Sterling Auty – Moffett

Siti Panigrahi – Mizuho

Meta Marshall – Morgan Stanley

Ryan Koontz – Needham

Brian Peterson – Raymond James

Matt Niknam – Deutsche Bank

Peter Levine – Evercore ISI

Matt Bullock – Bank of America

Matt Stotler – William Blair

Catharine Trebnick – Rosenblatt Securities

Bobby Dee – Truist

Michael Turrin – Wells Fargo Securities

Operator

Hello. And welcome to RingCentral’s First Quarter 2023 Earnings Conference Call. Let me now please turn the call over to Will Wong, Vice President of Investor Relations.

Will Wong

Thank you. Good afternoon. And welcome to RingCentral’s first quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Mo and Sonalee, followed by Q&A. We also have a slide presentation available on our investors website that will coincide with today’s call, which you can find under the Financial Results section at ir.ringcentral.com.

Some of our discussion and responses to your questions will contain forward-looking statements regarding the company’s business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control, and are not guarantees of future performance.

Actual results may differ materially from our forward-looking statements and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as today’s earnings release.

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

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, I will turn the call over to Vlad.

Vlad Shmunis

Good afternoon and thank you for joining our first quarter earnings conference call. We had a solid start to the year. Q1 results demonstrate that our strategy of driving healthy, profitable growth is paying off.

Total revenue grew 14% to $534 million, above the high end of our guidance range and ARR grew 14% to $2.2 billion. Operating margin rose almost 700 basis points year-over-year to 17.2%. This was also above our guidance and was once again a quarterly record.

Our higher margin was driven by continued cost discipline, improved operational efficiencies and the benefits of the actions we took last year. Those actions position us to emerge stronger and more focused when the macro environment improves.

While the macro remains uncertain, we continue to be laser focused on what we can control. This includes driving continued innovation and maintaining our disciplined approach towards increasing profitability and free cash flow. Sonalee will provide more color on our profitability shortly.

You have heard me talk about trust, innovation and partnerships being the cornerstone of our success. As to trust, we achieved 99.999% availability for the 19th straight quarter. With respect to partnerships, Mo will provide more color on our progress with the channel, strategic partners and global service providers.

I will now highlight some of our key innovation accomplishments this quarter. We believe these innovations over time will increase our customer value proposition and create additional expansion opportunities within our large customer base.

These include; RingCentral for Teams 2.0, our next generation Microsoft Teams Embedded App; RingSense, our new AI platform and its first commercial application, RingSense for Sales; RingCentral for Frontline Workers, which combines new Push to Talk functionality with RingCentral Video and Messaging; and in partnership with Vodafone Business, we have released RingCentral Overlay, which enables our messaging and video collaboration capabilities on top of legacy voice services.

Let me now provide more details. First, we recently announced RingCentral for Teams 2.0. This solution brings RingCentral’s world class cloud PBX capabilities into Microsoft Teams with a fully native experience, without requiring a second application.

This means that end customers can now enjoy RingCentral’s renowned 99.999% reliability, global availability, advanced analytics, industry leading features and third-party integration capabilities entirely within Teams’ single pane of glass.

Second, RingSense. In the past, I have talked about four megatrends driving our business. These are; shift to hybrid work; ongoing adoption of mobility by businesses; increasing reliance on distributed workforces; and the desire for an integrated, cloud-based UC and CC solution from a single provider.

A fifth megatrend has now emerged that is truly revolutionary and that is AI. With RingSense, we now have the ability to inject AI capabilities across the entire RingCentral portfolio. As one of the world’s largest UCaaS providers, we are in a unique position to offer our customers powerful insights into their conversations.

With RingSense for Sales, our first offering in this portfolio, we will be able to offer sales teams features such as engagement scoring, keyword analysis and AI generated recommendations. We are currently transitioning our own sales team from a third-party conversational intelligence solution to RingSense for Sales, as well as testing it with a number of customers in closed beta.

Third is RingCentral for Frontline Workers. This powerful solution combines new push to talk capabilities with RingCentral Video and Messaging. Gartner estimates there are 2.7 billion front line workers, more than two times the number of desk-based workers.

With our solution, frontline workers across all industries can use any smart mobile device to seamlessly and efficiently connect with their front and back-office teams. It is available in beta today as either a standalone solution or as an add-on to RingCentral MVP. Mo will provide more details.

And fourth, RingCentral Overlay, which enables RingCentral messaging and video collaboration capabilities for legacy customers. This innovation, in partnership with Vodafone Business, enables hybrid workforces and serves as a stepping stone for those customers to move to our complete UCaaS communications solution in the future.

In summary, it was a solid quarter across growth, profitability and innovation. We continue to innovate, enhancing our differentiation. We are also laser focused on efficiency, which we expect will generate robust free cash flow going forward. This sets us up well for the future and is why I am so excited about the opportunity in front of us.

Now, let me turn the call over to Mo to go over the quarter in more detail.

Mo Katibeh

Thanks Vlad. We had a solid quarter, with healthy growth across the portfolio. An example of a win contributing to this healthy growth is a Fortune 500 company that purchased five thousand seats of UCaaS and five thousand seats of CCaaS. They selected RingCentral for three main reasons.

First, our ability to integrate seamlessly into Teams, providing 99.999% reliability and deep integrations into ServiceNow, Salesforce and other key aspects of their employees’ workflows.

Second, our integrated UC and CC platform. Beyond the simplicity of having a single vendor to manage, the entire organization can now use a single communications platform. This results in increased customer satisfaction and potential new revenue opportunities. For example, if no one at a local branch location picks up after a certain number of rings, the call can now be easily forwarded to its contact center.

And finally, the company is projecting to save millions of dollars by standardizing on a single platform, removing maintenance costs, shadow IT, and telco fees.

Reducing costs is a key value proposition for all of our customers, especially in today’s environment. We continue to see good traction within our core business because of our ability to help customers save money.

Forrester, a third-party research firm, recently published a new report on the total economic impact of using RingCentral MVP and Contact Center together. This report concluded that customers are seeing a 211% return on investment, with an average payback of under six months.

In addition, Forrester concluded that using RingCentral UCaaS and CCaaS together had three key benefits. First, call handling time was reduced by 45% versus 20% for a standalone contact center. Second, internal contact center and UCaaS IT support tickets were reduced by 30%. And third, time to close each ticket was reduced by 60%.

Moving on to our Teams practice. In Q1, seats within our Teams business more than doubled year-over-year. With our updated RingCentral for Teams 2.0 solution, which is available in beta today and will be generally available this summer, we are able to provide an even better user experience and that’s not all.

Most Teams users are on E1 or E3 licenses, including many in key customer facing verticals such as healthcare, retail and professional services. Those customers chose RingCentral versus Teams Phone given our deep integrations, reliability and advanced feature sets, all at a very attractive price point.

For example, UKG, a leading provider of HR, payroll, and workforce management solutions, is currently using RingCentral with Microsoft Teams. We integrate seamlessly within their existing workflows, enhancing both their internal employee experience and their customer communications.

Now, let me give you an update on our go to market. First, strategic partners. Avaya just emerged from bankruptcy a few days ago and we expect their contribution to ramp in the latter part of the year. Also, Mitel continues to perform in line with expectations and closed a $1 million TCV transaction in Q1.

We are also seeing good traction with many of our GSP partners. Charter, one of our newest partners, performed well. We also launched with Vodafone Business in additional European geographies.

Lastly, our new partnership with AWS, while still in early days, is developing well and we expect to be on the AWS Marketplace later this year.

Now, Channel partners. They represent about 40% of our ARR base and continue to help us broaden our reach. The channel is an important part of our go-to-market and we continue to ensure that incentives are aligned with the value that they bring.

In fact, we recently launched our RingCentral Ignite program that enables partners to manage all go-to-market and customer lifecycle activities without RingCentral sales assistance, which in turn provides economic benefit for all parties.

Moving to international. I’d like to highlight two international deals that we closed with our partners. The first is with a European athletic retailer with over 2,000 stores. They selected a RingCentral solution to help them streamline communications across their retail stores in France.

They purchased thousands of MVP seats and also added our new front-line push to talk capabilities. This will allow store members to easily and securely communicate through voice, video or messaging with the push of a button, and all without additional hardware.

The other is a regional government body in Europe that recently selected RingCentral to provide video and messaging to more than 55 thousand users. This was a great win and demonstrated the power and value RingCentral Video and Messaging can provide a large organization on a standalone basis.

Lastly, I want to discuss the current demand environment. The macro remains consistent with the trends we have been seeing over the last few quarters. Also, sales cycles remain elevated versus last year as customer buying decisions continue to receive significant internal scrutiny and additional layers of approval.

We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts. However, win rates remain stable and lead flow remains consistently strong, demonstrating continued demand for on-prem to cloud conversion.

With that, let me turn the call over to Sonalee to discuss our financials.

Sonalee Parekh

Thanks Mo. I will provide highlights from the first quarter and then discuss our business outlook for the second quarter and full year. Subscriptions revenue of $508 million was up 16% year-over-year and above our guidance range. On a constant currency basis, subscriptions revenue rose 17% year-over-year.

ARR rose 14% versus last year to $2.2 billion. On a constant currency basis, ARR rose 15%. We continue to expect ARR growth to outpace subscription revenue growth in 2023. This is due to our enterprise business being more back half weighted.

Moving to profitability. I will be referring to non-GAAP results, unless otherwise noted. Our subscription gross margin was solid, at 81.8%. Overall ARPU was again resilient and above $30, supporting our strong gross margin.

Operating margin rose 680 basis points versus last year to 17.2%, another quarterly record. The increase was driven by efficiencies generated across the business, most notably in sales and marketing, which was down 420 basis points versus last year. Q1 demonstrated good progress on our path to driving best-in-class profitability and free cash flow commensurate with our scale.

Regarding free cash flow, we generated $54 million in Q1 2023, which includes roughly $7 million related to one-time restructuring items. The improvements to our cost of customer acquisition, collections activity, vendor management and continued focus on driving efficiencies is leading to strong free cash flow conversion and we expect continued improvement throughout the year.

Our focus on growing free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and importantly, addressing our convertible debt maturities.

Regarding our debt, our free cash flow provides us many options in terms of how we address our convertible maturities. While our two converts both carry a zero percent coupon and are not due until 2025 and 2026, still two years and three years out, respectively, they are a top priority for us and for me personally.

Based on our 2023 outlook and assuming our current capital structure, our net leverage will be less than 3 times net debt to EBITDA for the trailing twelve months ending December 31, 2023, which we expect will continue to improve. Given the deleveraging profile, we believe we have a number of attractive choices to address our outstanding convertible maturities.

Now, turning to guidance. While we outperformed our Q1 revenue outlook, we are still early in the year. Given the macro uncertainty, we are remaining prudent in our guidance. Taking this into account, for the second quarter of 2023, we expect; subscriptions revenue growth of 10% to 11%; total revenue growth of 10%; non-GAAP operating margin of 17.5%; and non-GAAP EPS of $0.74 to $0.76.

For the full year 2023, we now expect; subscriptions revenue growth of 11%, up from 10% to 11%; total revenue growth of 10% to 11%; non-GAAP operating margin of at least 18.5%, up from our prior outlook of at least 18.0%.

Based on the midpoint of our revenue guidance, we expect operating profit dollars to grow at least 65%, up from at least 60%. Non-GAAP EPS of $3.19 to $3.25, up from our prior outlook of $3.04 to $3.10.

In summary, Q1 was a solid quarter. We exceeded guidance on both top and bottomline. We continue to see healthy growth in our business despite the current macro backdrop. We believe the market opportunity, our leading and differentiated product, and a laser focus on balancing growth with increased profitability positions us well for continued success.

With that, let’s open the call for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] The first question today comes from Samad Samana with Jefferies. Please go ahead.

Samad Samana

Hi. Good afternoon. Thanks for taking my questions. Good to see the stable results. Vlad, maybe for you. I just was curious, you talked about a number of new products and increased innovation. And I am curious, how do you think about those products, do you see them as ways to expand ARPU or drive cross-sell upsell or do you see those as features that add value that will make it easier to acquire customers? Just maybe how should we think about whether there’s a direct monetization opportunity or is this a way to continue to attract more and more customers to the RingCentral platform?

Vlad Shmunis

Yeah. Hi, Samad. Great question. Look, it’s a bit of both and it depends. So, for example, when you look at RingSense, our AI or entering into the AI space, that is absolutely a growth driver is how we see it. It will be monetized separately.

I also want to point out that it is not only aimed to be an add-on to our existing customers or to RingCentral customers, in general, but we also designed it in a way that it could be a standalone product, working with other UCaaS, CCaaS, and frankly, even UC and CC solutions. It is a general purpose like that.

When you look at frontline workers with push to talk, it’s a whole separate SKU in its own right, and again, it can stand on its own or can be added to customers.

When you look at our work on overlay, that’s actually super exciting, yeah? Because this is really the first time to where we are showing clear traction in areas outside of our core PBX in the cloud.

So the whole point in overlay is to integrate with legacy on-prem providers but augment the experience — customer experience with our video and messaging, and this, we believe, will, A, it presents a separate monetizable opportunity in its own right, as well as sets up for an easier migration path for those customers once they want to go ahead and embrace the whole cloud, okay? Am I missing something, can you think or good?

So, again, a bit of both is the short answer. But having said that, look, anything we do, any value, oh, I am sorry, by far not last or the least, is our Teams work and what we call RingCentral for Teams 2.0., and look, that’s a major, major step forward.

We believe that we simply, at this point, have the best Teams integration in the market today in the universe. It’s a completely seamless experience. What we have heard from customers, loud and clear, is that they — if they have standardized on Teams, they would much prefer to operate within the Teams’ single pane of glass.

But as we all know, Teams does not really have a, call it, fully viable UCaaS solution, we do and this is a very close integration. So we feel — look, we had good Teams business before, but we were far with the market, technology-wise. This we believe will really push us and position us well ahead of competition.

Again, it will absolutely open new doors for us. So it is definitely a revenue driver moving forward, but we also believe will be — will provide stickiness to our existing Teams’ customers, because it’s just a much better experience.

Operator

The next question comes from Sterling Auty with Moffett. Please go ahead.

Sterling Auty

Yeah. Thanks. Hi, guys. I just wondered if you could go maybe one layer deeper in terms of your discussion around how you are going to handle the convertible debt, maybe you don’t want to get into too much specifics. But anything that you can give around timing and how proactive you want to be with managing it, as well as just what are some of the options that to be the most obvious for managing through? Thank you.

Sonalee Parekh

Thanks, Sterling. Hey. It’s Sonalee here and thanks for the question. As I said in my prepared remarks, this is a very specific focus for us as a management team and for me personally. So a couple of points I would make without giving too much away.

One is that we expect to generate growing free cash flow over the next several years. And you would have seen in today’s print, along with expanding operating margin by nearly 700 basis points year-over-year, we also delivered a quarterly record on free cash flow.

So free cash flow was $61 million in the quarter and that was including about $7 million of restructuring charges and we are clearly not done yet when it comes to free cash flow. Within that, we have several options to address the convert. So one is using the cash that we are generating organically, again, which will — you will see improved throughout the year.

Secondly, you may remember, last quarter, we announced a $400 million Term Loan A. That’s a delayed draw facility, which we have available to us through November of 2023 and we will be opportunistic in terms of when and if we decide to draw on that, depending on market conditions.

But with the financial profile we are driving and if you think about how rating agencies, for example, look at enterprises such as ourselves and you think about our EBITDA profile, we will have other financing options available to us.

So we will have access to more conventional debt markets, which we can tap if we so desire. Today, the coupon on the convertible debt is zero percent. That’s a CFO’s dream. So we will balance addressing the convert with other capital allocation priorities, but we will not allow the converts to go current.

Operator

The next question is from Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi

Thanks for taking my question. And definitely I just want to focus on profitability cash flow. It’s good to see that progress even on the margin expansion side, Sonalee. So I understand that you are benefiting from some of the cost cutting and the headcount reduction you did announce earlier. But could you talk about some of the other drivers and progress there and driving margin expansion and also further cash flow conversion? How sustainable is that? How should we think about for the next few quarters or years?

Sonalee Parekh

Sure, Siti. And I am just going to hit the second part of your question right off the bat. It is very sustainable, and again, I am going to repeat, there’s more to come. We are not done yet. You saw the 700 basis point improvement year-over-year this quarter.

But you also know that we raised our OP margin guidance for the full year. We are now targeting at least 18.5% operating margins and still very much exiting at at least 20% in Q4. So not only is it sustainable, it’s going to get better from here. Yes, we did take some actions at the end of last year, difficult actions that you are seeing flow through the numbers in the current quarter.

I think the profit potential of our business model at scale is really starting to shine through and we are continuing to focus on the productivity of our workforce and optimizing and driving down the cost of customer acquisition. This is something you have heard Mo and I talk about in the past and that’s an area that we are still really investing in.

Another personal example I will give you, just from the finance side around efficiency actions is in the procurement project that we are running. We had many, many manual processes from procurement to payment as you might understand for a company that scaled and grew as quickly as we did.

And at the moment, within my finance team, we are implementing a software that will automate a lot of these processes and that procurement initiative alone will be saving high single-digit millions, just that one initiative within finance.

There’s also the operating leverage inherent in the business. We are focusing on higher ROI programs. We are really prioritizing how and when where we are investing our dollars. We are actively managing the workforce.

So that includes opening up hubs in Dallas and Charlotte, which are lower cost geos versus making incremental hires in Belmont. For example, in my team, I am not making incremental hires on the finance side in Belmont. Any of those new hires would be in lower cost geos.

And then Mo will probably talk a little bit about what we are doing on the channel side. But we are very much looking at how we pay our partners and how we work with those partners and that will drive further efficiencies and incremental savings. As partners really take on a larger role in the overall soup to nuts sale process.

And then, finally, the vendor management consolidation where we are reviewing every contract, rationalizing licenses, bidding out our vendor contracts, everything to really get to best-in-class best practice.

And one last thing I will share just because you were pushing on the sustainability of this profitability and I do want to also make a strong point on free cash flow. We shared last quarter that we would double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by 2024 by fiscal year end.

I am now confident we can achieve this level of free cash flow generation much earlier than end of fiscal year 2024. And this level of free cash flow generation gives us a lot of flexibility around capital allocation, and importantly, addressing our convertible debt in a cost-efficient manner.

Operator

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall

Great. Thanks. I just wanted to see if you could kind of break down with some of the upside that you saw to the quarter that lower churn, is that better pricing on renewals, is that just slightly better that adds? It appeared kind of the mid-market was the greatest source of kind of incremental ARR growth. So just trying to see is that churn came in a little bit less than expected. Just any details on kind of that context would be helpful? Thanks.

Sonalee Parekh

Thanks, Meta. Yeah. So I think I will start off just by addressing net retention, which again is a big focus for this management team. So we produced net retention, we came in at above 100%. And within that, churn remains stable on a percentage basis, so annualized churn on a percentage basis.

What I will call out is, stable churn on a larger base does actually mean higher dollar churn, but overall churn stable and within plan. Again, we are actively focused on it. We have invested in CSM, so customer success and analytics in this area as this is a big renewal year as COVID laps.

What I would say is that, we saw some pressure in upsell due to the macro we believe and that was mostly in enterprise. So you are absolutely right to call out that SMB was a bright spot. So we saw no material change to the dynamics in that business.

And some customers within enterprise are starting to rationalize seats, given the headcount actions that they are taking internally. But we are very much focused on maintaining the logos, and again, just investing actively in that area. Mo may want to add a bit in terms of the strength we are seeing on SMB.

Mo Katibeh

Yeah. Sonalee I think you nailed it at the end of the day strength in SMB. We are seeing that market stabilize. It’s continuing to do well for us. Acquisition broadly across the Board was strong. And then, as Sonalee pointed out, stable churn and these are the factors that we have utilized as we think about our go-forward guide as well.

Operator

The next question comes from Ryan Koontz with Needham. Please go ahead.

Ryan Koontz

Thanks for the question. I wanted to ask about the Teams’ environment. I had a chance to see your 2.0 at Enterprise Connect and I was really interested in that. We have also heard anecdotally that Teams Phone are really slowing. I am sure that’s due to the macro in general. But I wonder if you are seeing any impact on that in terms of your upside opportunity to sell the turnkey Ring UCaaS solution versus opportunities to sell into Teams as your own app inside Teams. I appreciate any color on that? Thank you.

Mo Katibeh

Thanks, Ryan, and thanks for coming by and checking out the demos. Right now our — as we have said in our prepared remarks, we are seeing strong growth with our Teams 1.0 business, if you will, over 100% seat growth year-over-year.

As we think about Teams 2.0, it really is an opportunity to drive traction with what is already a fairly substantial Teams’ base through a significantly improved experience versus what we offer in our 1.0 product, and frankly, as Vlad pointed out, what other competitors in the market are offering.

And our motion there is really about targeting E1 and E3 users that don’t have a Teams Phone license and constitute the vast majority of the Teams users that are out there. And this plays directly into our BAU sales motion, if you will, where as part of the discovery process, we are talking to our customers about what solutions they are using today.

Are they on an on-prem legacy solution? Some of them may tell us that they are a Teams user and to the degree that they are a Teams user, then we pivot into offering the value and the benefits of our integrations, our analytics, all frankly, at one simple valuable price. And then to the degree that a customer needs contact center as well, CCaaS, we are able to integrate that and bring that to life.

So to simply answer your question, there’s a fairly material number of Teams users out there today. We continue to see that as a key growth opportunity for us moving forward and it only gets better with our 2.0 solution.

Operator

The next question comes from Brian Peterson with Raymond James. Please go ahead.

Brian Peterson

Congrats on the strong quarter, guys. So I just wanted to start on the enterprise in the top of funnel. I know you mentioned that ARR growth and the revenue growth in Enterprise was the delta there. What are you guys seeing in the top of the funnel that gives you confidence that, that enterprise will step up in the back half of the year? Thanks, guys.

Mo Katibeh

Thanks for the question, Brian. Appreciate it. As we think about the top of the funnel, our lead flow is still quite strong. And as I mentioned a few minutes ago, we are seeing broad acquisition strength across the Board.

The dynamic that’s in play and quite obviously driven by the macro environment, is the upsell-down-sell, two sides of the same coin are impacting our enterprise business. And so as the macro improves, our ability to sell our traditional product set into the enterprise, organically, will improve with it, one, and then two, and obviously, this takes a little bit longer.

But as you think about the new innovations that Vlad articulated, they become new cross-sell, upsell opportunities, as well as an acquisition of wedge strategy, if you will, the ability to go sell these new products as a standalone and then pull through our UCaaS and CCaaS solutions along with it. So those are the dynamics that are playing out. Thanks for the question.

Operator

The next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam

Hey, guys. Thanks for taking the question. I am just curious if you can talk about the cadence of bookings over the course of the quarter, and more specifically, I guess, was there any drop off in March or any spillover into April? And then just one quick follow-up on small business ARR, obviously, very resilient. I am just wondering if you can comment on what’s driving the relative resiliency there maybe relative to just midsize and enterprise? Thanks.

Sonalee Parekh

Sure. Hey, Matt, Sonalee here. I will take the first part of the question and then I may hand over to Mo just on — specifically on SMB. So in terms of linearity on bookings, as you know, we don’t guide specifically on bookings, but I think in the current environment, it is worth giving you some color.

I won’t speak specifically month by month, but yes, we did see much more back-end-loaded bookings. So March was the lion’s share of bookings for this quarter. And as you know, we have guided or given some color last quarter around ARR growth being higher than total revenue growth for the full year and we still expect that to be the case.

And as you know, enterprise bookings anyway tend to be more back-end loaded. So we are seeing more of that trend in the current environment. So I will hand over to Mo just on who can talk to the SMB trends.

Mo Katibeh

Yeah. So thanks for the question. As you think about the opportunity to close cycle time dynamics, we articulated that we are still continuing to see elongated cycle times vis-à-vis Q1 of last year.

Now as you think about SMB/SOHO and SMB Space, obviously, that opportunity to close is significantly faster. And one of the dynamics that played out for us during the quarter was, frankly, very good execution by our marketing organization that we have talked about historically that we were going to rationalize brand spend, we are going to improve the efficacy of our marketing demand gen motion and that is playing out.

With the less, they were able to drive more pipeline. That pipeline closes fairly quickly down market and is one of the reasons that you are seeing the strength in the numbers that we were able to put up. Thanks for the question.

Operator

The next question comes from Peter Levine with Evercore ISI. Please go ahead.

Peter Levine

Yeah. Thank you for taking my question. Yeah. Maybe Mo one for you is, you called out Avaya reemerging from bankruptcy, and I guess, you would have seen some kind of impact from the channel. Was there — I mean I guess when they were in bankruptcy, was there an impact in the first half, and then if so, can you maybe quantify what that impact was? And then maybe second, certainly, ARPU above $30 million. Can you maybe dissect what core UCaaS pricing looks like if you were to exclude contact center from that number? Thank you.

Mo Katibeh

Thanks for the question, Peter. So to talk about Avaya, look, they just emerged from bankruptcy a few days ago at the very beginning of May. As we have said before, we are expecting that their contribution will ramp in the latter part of this year, obviously, tied to putting the restructuring behind them.

We are comfortable that the contractual provisions that we have in place are going to allow us to achieve the minimum commitment volumes that we talked about last quarter, as well as the enablement of new go-to-market motions including wholesale, integrations, additional integrations that we are building tied to Avaya legacy contact center, et cetera, et cetera.

And frankly, to the degree that they are not able to achieve those commitments, if that ever happens, then we are comfortable that there’s mechanisms in place to address that as well. So, with that, Sonalee, I will turn it over to you to talk about ARPU.

Sonalee Parekh

Yeah. Thanks for the question, Peter. So as you know, we look at and run the business and disclose ARPU on a blended basis and I am happy to say that the trend was stable there. As you know, CCaaS has higher ARPU, a significantly higher ARPU than UCaaS.

But even when you take out the CCS number from overall ARPU, they are generally holding steady. There was a little bit of weakness in UCaaS relative to CCaaS, but it’s very, very mild. Overall, very stable and stable within a range. And there was some of that was actually, to be clear, some of the softness was FX, but it was very marginal.

Mo Katibeh

Yeah. Spot on. Yeah.

Sonalee Parekh

And no material change.

Operator

The next question comes from Michael Funk with Bank of America. Please go ahead.

Matt Bullock

Hi. This is Matt on for Mike. Thanks for taking the question. It’s great to hear that the demand environment is broadly holding up. Can you call out any incremental strength or weakness you saw in specific verticals this quarter?

Mo Katibeh

Yeah. Thanks Matt for the question. As we have talked about in previous quarters, the strength that we are seeing relative to verticals really ties back to areas that are very focused on what we call business to consumer, a.k.a., verticals and companies that sell or service end consumers as their customers.

So healthcare, financial services, retail, professional services, public are generally the areas that value UCaaS and the services that we provide, frankly, because voice reliability, service uptime, et cetera, has got to be rock solid, because it’s the difference between happy customers driving revenue, et cetera. Those are still the verticals that are doing really, really well for us and provide meaningful opportunity as we look ahead.

Operator

The next question comes from Matt Stotler with William Blair. Please go ahead.

Matt Stotler

Hi, everybody. Thanks for taking the question. Maybe just a follow-up and maybe this one for Mo, but it’s based on something Sonalee mentioned earlier. And so we talked about last quarter was some efficiency improvement initiatives around partners specifically and shipping incentive structures and those relationships. Just maybe give an update on the level of acceptance you are seeing with those changes at partners and then any kind of early indications on the impact on productivity of the relationships?

Mo Katibeh

Very good. Broadly, we did not see any impact year-over-year relative to our partnerships tied to the changes that we have made. As we disclosed last year, I am sorry, last quarter, ALE and Atos are no longer exclusive. We remain partners with them, they continue to have a large on-prem base and they are going to be compensated as seats are sold.

That’s generally the model that we have been targeting, that model we find drives the right incentive structure and behavior, and then broadly from our channel partners, we are continuing to see the lead flow is steady and no meaningful change quarter-over-quarter.

The only other comment that I’d make and going back to my prepared remarks is the launch of what we are calling the RingCentral Ignite program. We have had a variant out there for a while, but we are really putting some — we are behind the arrow, if you will. And what this program does is serve as another way for us to help continue driving our sales and marketing percentage of revenue in the right direction over time.

And how does it do that? One, it provides economic incentive for our partners to take on more of the sales and marketing motion themselves and not include our own direct sales base. This is a great motion, many of our channel partners have longstanding relationships with on-prem legacy customers that they are now able to go work with, move them over to RingCentral and do it without any additional incentive. This drives economic benefit for all parties, and early days, but we are seeing very solid interest from the channel partner community about this motion as well.

Operator

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Unidentified Analyst

Hi. This is Dan Cogman [ph] on for Ryan MacWilliams. Thanks for taking my question. I was just curious how your renewals fared in the first quarter maybe compared to the fourth quarter and if you have seen any changes in these customer renewals as a result of macro.

Mo Katibeh

Well, we don’t guide on renewals, but what I will bring you back to is a comment that Sonalee made, which is we are seeing the churn as a percentage is stable and doing well. As we mentioned, in the enterprise space, upsell and down-sell, frankly, two sides of the same coin. There is some pressure on the down-sell side at the renewal time frame as our enterprise customers who have been impacted themselves by the macro are doing some degree of rationalization of seats tied to their own needs. But again, broadly speaking, the churn percentage has remained stable quarter-over-quarter, year-over-year.

Operator

The next question comes from Catharine Trebnick with Rosenblatt Securities. Please go ahead.

Catharine Trebnick

Oh! Thank you for taking…

Operator

It looks like we have left our connection to Catherine. The next question comes from Terry Tillman with Truist. Please go ahead.

Bobby Dee

Great. Thanks for taking the question. This is Bobby Dee on for Terry. Just one on contact center. For those larger million-dollar-plus deals, is contact center attached still in the over 60% range or has there been any notable up or downtick in attach year-to-date? Thank you.

Mo Katibeh

Stable. We are continuing to see our $1 million-plus TCV deals have more than 60% attach of CCaaS and really this boils back to what we have seen historically, which is in the legacy UC-CC base, about 60% of all of the CC seats sold were from the same vendors that were selling UC to those customers.

It’s a very obvious buying motion. It drives significant economic benefits to customers, as I laid out in my prepared remarks, recently validated by Forrester, an independent third-party consulting company.

Operator

Today’s last question comes from Michael Turrin with Wells Fargo Securities. Please go ahead.

Michael Turrin

Hey, there. Thanks for sneaking me in. Sonalee, I just want to go back to margin. You are unlocking a lot of margin expansion in fairly quick order. You had some useful commentary around the sustainability of those improvements. Is there anything you can add around how you ensure you are driving the right level of optimization and still leaving enough in the tank for growth to hold in above double digits going forward as well, just curious on how you manage the balance through this? Thanks.

Sonalee Parekh

Yeah. Sure. I mean, you have heard us say that we are focused on driving healthy, profitable growth. So we absolutely are and always will be a growth company. What I said in previous calls and tried to reiterate today is, we are seeing the benefit of scale in the model.

We are actually seeing the profit potential of the business model starting to shine through and that’s from lots of efficiencies we found within the workforce, within optimizing our cost of customer acquisition.

And you may remember last quarter when we talked about the actions we were taking, we were very specific not to touch frontline salespeople and that is something that is still very much part of the RingCentral playbook in terms of becoming significantly more profitable and significantly more cash generative. We are protecting the P times Q selling motions within the portfolio.

And some of the things that we have talked about, Mo was talking about lowering customer acquisition within the channel, I talked about vendor consolidation, reviewing contracts, rationalizing licenses, being disciplined about expense, being disciplined about hiring in some of the G&A areas where we still have a bit of work to do, but we feel like we have come a long way.

So what I would say is that, we feel like we are getting the balance right and I very much believe that we need to invest for growth. And one of the great things about optimizing your cost base is it frees up cash to be able to invest in future and that’s what this team will be focused on.

Operator

Thank you all. And that concludes our call for today. You may now disconnect.

RingCentral, Inc. (NYSE:RNG) Q1 2023 Earnings Conference Call May 9, 2023 5:00 PM ET

Company Participants

Will Wong – Vice President, Investor Relations

Vlad Shmunis – Founder, Chairman and CEO

Mo Katibeh – President and COO

Sonalee Parekh – Chief Financial Officer

Conference Call Participants

Samad Samana – Jefferies

Sterling Auty – Moffett

Siti Panigrahi – Mizuho

Meta Marshall – Morgan Stanley

Ryan Koontz – Needham

Brian Peterson – Raymond James

Matt Niknam – Deutsche Bank

Peter Levine – Evercore ISI

Matt Bullock – Bank of America

Matt Stotler – William Blair

Catharine Trebnick – Rosenblatt Securities

Bobby Dee – Truist

Michael Turrin – Wells Fargo Securities

Operator

Hello. And welcome to RingCentral’s First Quarter 2023 Earnings Conference Call. Let me now please turn the call over to Will Wong, Vice President of Investor Relations.

Will Wong

Thank you. Good afternoon. And welcome to RingCentral’s first quarter 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer.

Our format today will include prepared remarks by Vlad, Mo and Sonalee, followed by Q&A. We also have a slide presentation available on our investors website that will coincide with today’s call, which you can find under the Financial Results section at ir.ringcentral.com.

Some of our discussion and responses to your questions will contain forward-looking statements regarding the company’s business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control, and are not guarantees of future performance.

Actual results may differ materially from our forward-looking statements and we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as today’s earnings release.

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

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, I will turn the call over to Vlad.

Vlad Shmunis

Good afternoon and thank you for joining our first quarter earnings conference call. We had a solid start to the year. Q1 results demonstrate that our strategy of driving healthy, profitable growth is paying off.

Total revenue grew 14% to $534 million, above the high end of our guidance range and ARR grew 14% to $2.2 billion. Operating margin rose almost 700 basis points year-over-year to 17.2%. This was also above our guidance and was once again a quarterly record.

Our higher margin was driven by continued cost discipline, improved operational efficiencies and the benefits of the actions we took last year. Those actions position us to emerge stronger and more focused when the macro environment improves.

While the macro remains uncertain, we continue to be laser focused on what we can control. This includes driving continued innovation and maintaining our disciplined approach towards increasing profitability and free cash flow. Sonalee will provide more color on our profitability shortly.

You have heard me talk about trust, innovation and partnerships being the cornerstone of our success. As to trust, we achieved 99.999% availability for the 19th straight quarter. With respect to partnerships, Mo will provide more color on our progress with the channel, strategic partners and global service providers.

I will now highlight some of our key innovation accomplishments this quarter. We believe these innovations over time will increase our customer value proposition and create additional expansion opportunities within our large customer base.

These include; RingCentral for Teams 2.0, our next generation Microsoft Teams Embedded App; RingSense, our new AI platform and its first commercial application, RingSense for Sales; RingCentral for Frontline Workers, which combines new Push to Talk functionality with RingCentral Video and Messaging; and in partnership with Vodafone Business, we have released RingCentral Overlay, which enables our messaging and video collaboration capabilities on top of legacy voice services.

Let me now provide more details. First, we recently announced RingCentral for Teams 2.0. This solution brings RingCentral’s world class cloud PBX capabilities into Microsoft Teams with a fully native experience, without requiring a second application.

This means that end customers can now enjoy RingCentral’s renowned 99.999% reliability, global availability, advanced analytics, industry leading features and third-party integration capabilities entirely within Teams’ single pane of glass.

Second, RingSense. In the past, I have talked about four megatrends driving our business. These are; shift to hybrid work; ongoing adoption of mobility by businesses; increasing reliance on distributed workforces; and the desire for an integrated, cloud-based UC and CC solution from a single provider.

A fifth megatrend has now emerged that is truly revolutionary and that is AI. With RingSense, we now have the ability to inject AI capabilities across the entire RingCentral portfolio. As one of the world’s largest UCaaS providers, we are in a unique position to offer our customers powerful insights into their conversations.

With RingSense for Sales, our first offering in this portfolio, we will be able to offer sales teams features such as engagement scoring, keyword analysis and AI generated recommendations. We are currently transitioning our own sales team from a third-party conversational intelligence solution to RingSense for Sales, as well as testing it with a number of customers in closed beta.

Third is RingCentral for Frontline Workers. This powerful solution combines new push to talk capabilities with RingCentral Video and Messaging. Gartner estimates there are 2.7 billion front line workers, more than two times the number of desk-based workers.

With our solution, frontline workers across all industries can use any smart mobile device to seamlessly and efficiently connect with their front and back-office teams. It is available in beta today as either a standalone solution or as an add-on to RingCentral MVP. Mo will provide more details.

And fourth, RingCentral Overlay, which enables RingCentral messaging and video collaboration capabilities for legacy customers. This innovation, in partnership with Vodafone Business, enables hybrid workforces and serves as a stepping stone for those customers to move to our complete UCaaS communications solution in the future.

In summary, it was a solid quarter across growth, profitability and innovation. We continue to innovate, enhancing our differentiation. We are also laser focused on efficiency, which we expect will generate robust free cash flow going forward. This sets us up well for the future and is why I am so excited about the opportunity in front of us.

Now, let me turn the call over to Mo to go over the quarter in more detail.

Mo Katibeh

Thanks Vlad. We had a solid quarter, with healthy growth across the portfolio. An example of a win contributing to this healthy growth is a Fortune 500 company that purchased five thousand seats of UCaaS and five thousand seats of CCaaS. They selected RingCentral for three main reasons.

First, our ability to integrate seamlessly into Teams, providing 99.999% reliability and deep integrations into ServiceNow, Salesforce and other key aspects of their employees’ workflows.

Second, our integrated UC and CC platform. Beyond the simplicity of having a single vendor to manage, the entire organization can now use a single communications platform. This results in increased customer satisfaction and potential new revenue opportunities. For example, if no one at a local branch location picks up after a certain number of rings, the call can now be easily forwarded to its contact center.

And finally, the company is projecting to save millions of dollars by standardizing on a single platform, removing maintenance costs, shadow IT, and telco fees.

Reducing costs is a key value proposition for all of our customers, especially in today’s environment. We continue to see good traction within our core business because of our ability to help customers save money.

Forrester, a third-party research firm, recently published a new report on the total economic impact of using RingCentral MVP and Contact Center together. This report concluded that customers are seeing a 211% return on investment, with an average payback of under six months.

In addition, Forrester concluded that using RingCentral UCaaS and CCaaS together had three key benefits. First, call handling time was reduced by 45% versus 20% for a standalone contact center. Second, internal contact center and UCaaS IT support tickets were reduced by 30%. And third, time to close each ticket was reduced by 60%.

Moving on to our Teams practice. In Q1, seats within our Teams business more than doubled year-over-year. With our updated RingCentral for Teams 2.0 solution, which is available in beta today and will be generally available this summer, we are able to provide an even better user experience and that’s not all.

Most Teams users are on E1 or E3 licenses, including many in key customer facing verticals such as healthcare, retail and professional services. Those customers chose RingCentral versus Teams Phone given our deep integrations, reliability and advanced feature sets, all at a very attractive price point.

For example, UKG, a leading provider of HR, payroll, and workforce management solutions, is currently using RingCentral with Microsoft Teams. We integrate seamlessly within their existing workflows, enhancing both their internal employee experience and their customer communications.

Now, let me give you an update on our go to market. First, strategic partners. Avaya just emerged from bankruptcy a few days ago and we expect their contribution to ramp in the latter part of the year. Also, Mitel continues to perform in line with expectations and closed a $1 million TCV transaction in Q1.

We are also seeing good traction with many of our GSP partners. Charter, one of our newest partners, performed well. We also launched with Vodafone Business in additional European geographies.

Lastly, our new partnership with AWS, while still in early days, is developing well and we expect to be on the AWS Marketplace later this year.

Now, Channel partners. They represent about 40% of our ARR base and continue to help us broaden our reach. The channel is an important part of our go-to-market and we continue to ensure that incentives are aligned with the value that they bring.

In fact, we recently launched our RingCentral Ignite program that enables partners to manage all go-to-market and customer lifecycle activities without RingCentral sales assistance, which in turn provides economic benefit for all parties.

Moving to international. I’d like to highlight two international deals that we closed with our partners. The first is with a European athletic retailer with over 2,000 stores. They selected a RingCentral solution to help them streamline communications across their retail stores in France.

They purchased thousands of MVP seats and also added our new front-line push to talk capabilities. This will allow store members to easily and securely communicate through voice, video or messaging with the push of a button, and all without additional hardware.

The other is a regional government body in Europe that recently selected RingCentral to provide video and messaging to more than 55 thousand users. This was a great win and demonstrated the power and value RingCentral Video and Messaging can provide a large organization on a standalone basis.

Lastly, I want to discuss the current demand environment. The macro remains consistent with the trends we have been seeing over the last few quarters. Also, sales cycles remain elevated versus last year as customer buying decisions continue to receive significant internal scrutiny and additional layers of approval.

We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts. However, win rates remain stable and lead flow remains consistently strong, demonstrating continued demand for on-prem to cloud conversion.

With that, let me turn the call over to Sonalee to discuss our financials.

Sonalee Parekh

Thanks Mo. I will provide highlights from the first quarter and then discuss our business outlook for the second quarter and full year. Subscriptions revenue of $508 million was up 16% year-over-year and above our guidance range. On a constant currency basis, subscriptions revenue rose 17% year-over-year.

ARR rose 14% versus last year to $2.2 billion. On a constant currency basis, ARR rose 15%. We continue to expect ARR growth to outpace subscription revenue growth in 2023. This is due to our enterprise business being more back half weighted.

Moving to profitability. I will be referring to non-GAAP results, unless otherwise noted. Our subscription gross margin was solid, at 81.8%. Overall ARPU was again resilient and above $30, supporting our strong gross margin.

Operating margin rose 680 basis points versus last year to 17.2%, another quarterly record. The increase was driven by efficiencies generated across the business, most notably in sales and marketing, which was down 420 basis points versus last year. Q1 demonstrated good progress on our path to driving best-in-class profitability and free cash flow commensurate with our scale.

Regarding free cash flow, we generated $54 million in Q1 2023, which includes roughly $7 million related to one-time restructuring items. The improvements to our cost of customer acquisition, collections activity, vendor management and continued focus on driving efficiencies is leading to strong free cash flow conversion and we expect continued improvement throughout the year.

Our focus on growing free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares, and importantly, addressing our convertible debt maturities.

Regarding our debt, our free cash flow provides us many options in terms of how we address our convertible maturities. While our two converts both carry a zero percent coupon and are not due until 2025 and 2026, still two years and three years out, respectively, they are a top priority for us and for me personally.

Based on our 2023 outlook and assuming our current capital structure, our net leverage will be less than 3 times net debt to EBITDA for the trailing twelve months ending December 31, 2023, which we expect will continue to improve. Given the deleveraging profile, we believe we have a number of attractive choices to address our outstanding convertible maturities.

Now, turning to guidance. While we outperformed our Q1 revenue outlook, we are still early in the year. Given the macro uncertainty, we are remaining prudent in our guidance. Taking this into account, for the second quarter of 2023, we expect; subscriptions revenue growth of 10% to 11%; total revenue growth of 10%; non-GAAP operating margin of 17.5%; and non-GAAP EPS of $0.74 to $0.76.

For the full year 2023, we now expect; subscriptions revenue growth of 11%, up from 10% to 11%; total revenue growth of 10% to 11%; non-GAAP operating margin of at least 18.5%, up from our prior outlook of at least 18.0%.

Based on the midpoint of our revenue guidance, we expect operating profit dollars to grow at least 65%, up from at least 60%. Non-GAAP EPS of $3.19 to $3.25, up from our prior outlook of $3.04 to $3.10.

In summary, Q1 was a solid quarter. We exceeded guidance on both top and bottomline. We continue to see healthy growth in our business despite the current macro backdrop. We believe the market opportunity, our leading and differentiated product, and a laser focus on balancing growth with increased profitability positions us well for continued success.

With that, let’s open the call for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] The first question today comes from Samad Samana with Jefferies. Please go ahead.

Samad Samana

Hi. Good afternoon. Thanks for taking my questions. Good to see the stable results. Vlad, maybe for you. I just was curious, you talked about a number of new products and increased innovation. And I am curious, how do you think about those products, do you see them as ways to expand ARPU or drive cross-sell upsell or do you see those as features that add value that will make it easier to acquire customers? Just maybe how should we think about whether there’s a direct monetization opportunity or is this a way to continue to attract more and more customers to the RingCentral platform?

Vlad Shmunis

Yeah. Hi, Samad. Great question. Look, it’s a bit of both and it depends. So, for example, when you look at RingSense, our AI or entering into the AI space, that is absolutely a growth driver is how we see it. It will be monetized separately.

I also want to point out that it is not only aimed to be an add-on to our existing customers or to RingCentral customers, in general, but we also designed it in a way that it could be a standalone product, working with other UCaaS, CCaaS, and frankly, even UC and CC solutions. It is a general purpose like that.

When you look at frontline workers with push to talk, it’s a whole separate SKU in its own right, and again, it can stand on its own or can be added to customers.

When you look at our work on overlay, that’s actually super exciting, yeah? Because this is really the first time to where we are showing clear traction in areas outside of our core PBX in the cloud.

So the whole point in overlay is to integrate with legacy on-prem providers but augment the experience — customer experience with our video and messaging, and this, we believe, will, A, it presents a separate monetizable opportunity in its own right, as well as sets up for an easier migration path for those customers once they want to go ahead and embrace the whole cloud, okay? Am I missing something, can you think or good?

So, again, a bit of both is the short answer. But having said that, look, anything we do, any value, oh, I am sorry, by far not last or the least, is our Teams work and what we call RingCentral for Teams 2.0., and look, that’s a major, major step forward.

We believe that we simply, at this point, have the best Teams integration in the market today in the universe. It’s a completely seamless experience. What we have heard from customers, loud and clear, is that they — if they have standardized on Teams, they would much prefer to operate within the Teams’ single pane of glass.

But as we all know, Teams does not really have a, call it, fully viable UCaaS solution, we do and this is a very close integration. So we feel — look, we had good Teams business before, but we were far with the market, technology-wise. This we believe will really push us and position us well ahead of competition.

Again, it will absolutely open new doors for us. So it is definitely a revenue driver moving forward, but we also believe will be — will provide stickiness to our existing Teams’ customers, because it’s just a much better experience.

Operator

The next question comes from Sterling Auty with Moffett. Please go ahead.

Sterling Auty

Yeah. Thanks. Hi, guys. I just wondered if you could go maybe one layer deeper in terms of your discussion around how you are going to handle the convertible debt, maybe you don’t want to get into too much specifics. But anything that you can give around timing and how proactive you want to be with managing it, as well as just what are some of the options that to be the most obvious for managing through? Thank you.

Sonalee Parekh

Thanks, Sterling. Hey. It’s Sonalee here and thanks for the question. As I said in my prepared remarks, this is a very specific focus for us as a management team and for me personally. So a couple of points I would make without giving too much away.

One is that we expect to generate growing free cash flow over the next several years. And you would have seen in today’s print, along with expanding operating margin by nearly 700 basis points year-over-year, we also delivered a quarterly record on free cash flow.

So free cash flow was $61 million in the quarter and that was including about $7 million of restructuring charges and we are clearly not done yet when it comes to free cash flow. Within that, we have several options to address the convert. So one is using the cash that we are generating organically, again, which will — you will see improved throughout the year.

Secondly, you may remember, last quarter, we announced a $400 million Term Loan A. That’s a delayed draw facility, which we have available to us through November of 2023 and we will be opportunistic in terms of when and if we decide to draw on that, depending on market conditions.

But with the financial profile we are driving and if you think about how rating agencies, for example, look at enterprises such as ourselves and you think about our EBITDA profile, we will have other financing options available to us.

So we will have access to more conventional debt markets, which we can tap if we so desire. Today, the coupon on the convertible debt is zero percent. That’s a CFO’s dream. So we will balance addressing the convert with other capital allocation priorities, but we will not allow the converts to go current.

Operator

The next question is from Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi

Thanks for taking my question. And definitely I just want to focus on profitability cash flow. It’s good to see that progress even on the margin expansion side, Sonalee. So I understand that you are benefiting from some of the cost cutting and the headcount reduction you did announce earlier. But could you talk about some of the other drivers and progress there and driving margin expansion and also further cash flow conversion? How sustainable is that? How should we think about for the next few quarters or years?

Sonalee Parekh

Sure, Siti. And I am just going to hit the second part of your question right off the bat. It is very sustainable, and again, I am going to repeat, there’s more to come. We are not done yet. You saw the 700 basis point improvement year-over-year this quarter.

But you also know that we raised our OP margin guidance for the full year. We are now targeting at least 18.5% operating margins and still very much exiting at at least 20% in Q4. So not only is it sustainable, it’s going to get better from here. Yes, we did take some actions at the end of last year, difficult actions that you are seeing flow through the numbers in the current quarter.

I think the profit potential of our business model at scale is really starting to shine through and we are continuing to focus on the productivity of our workforce and optimizing and driving down the cost of customer acquisition. This is something you have heard Mo and I talk about in the past and that’s an area that we are still really investing in.

Another personal example I will give you, just from the finance side around efficiency actions is in the procurement project that we are running. We had many, many manual processes from procurement to payment as you might understand for a company that scaled and grew as quickly as we did.

And at the moment, within my finance team, we are implementing a software that will automate a lot of these processes and that procurement initiative alone will be saving high single-digit millions, just that one initiative within finance.

There’s also the operating leverage inherent in the business. We are focusing on higher ROI programs. We are really prioritizing how and when where we are investing our dollars. We are actively managing the workforce.

So that includes opening up hubs in Dallas and Charlotte, which are lower cost geos versus making incremental hires in Belmont. For example, in my team, I am not making incremental hires on the finance side in Belmont. Any of those new hires would be in lower cost geos.

And then Mo will probably talk a little bit about what we are doing on the channel side. But we are very much looking at how we pay our partners and how we work with those partners and that will drive further efficiencies and incremental savings. As partners really take on a larger role in the overall soup to nuts sale process.

And then, finally, the vendor management consolidation where we are reviewing every contract, rationalizing licenses, bidding out our vendor contracts, everything to really get to best-in-class best practice.

And one last thing I will share just because you were pushing on the sustainability of this profitability and I do want to also make a strong point on free cash flow. We shared last quarter that we would double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by 2024 by fiscal year end.

I am now confident we can achieve this level of free cash flow generation much earlier than end of fiscal year 2024. And this level of free cash flow generation gives us a lot of flexibility around capital allocation, and importantly, addressing our convertible debt in a cost-efficient manner.

Operator

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall

Great. Thanks. I just wanted to see if you could kind of break down with some of the upside that you saw to the quarter that lower churn, is that better pricing on renewals, is that just slightly better that adds? It appeared kind of the mid-market was the greatest source of kind of incremental ARR growth. So just trying to see is that churn came in a little bit less than expected. Just any details on kind of that context would be helpful? Thanks.

Sonalee Parekh

Thanks, Meta. Yeah. So I think I will start off just by addressing net retention, which again is a big focus for this management team. So we produced net retention, we came in at above 100%. And within that, churn remains stable on a percentage basis, so annualized churn on a percentage basis.

What I will call out is, stable churn on a larger base does actually mean higher dollar churn, but overall churn stable and within plan. Again, we are actively focused on it. We have invested in CSM, so customer success and analytics in this area as this is a big renewal year as COVID laps.

What I would say is that, we saw some pressure in upsell due to the macro we believe and that was mostly in enterprise. So you are absolutely right to call out that SMB was a bright spot. So we saw no material change to the dynamics in that business.

And some customers within enterprise are starting to rationalize seats, given the headcount actions that they are taking internally. But we are very much focused on maintaining the logos, and again, just investing actively in that area. Mo may want to add a bit in terms of the strength we are seeing on SMB.

Mo Katibeh

Yeah. Sonalee I think you nailed it at the end of the day strength in SMB. We are seeing that market stabilize. It’s continuing to do well for us. Acquisition broadly across the Board was strong. And then, as Sonalee pointed out, stable churn and these are the factors that we have utilized as we think about our go-forward guide as well.

Operator

The next question comes from Ryan Koontz with Needham. Please go ahead.

Ryan Koontz

Thanks for the question. I wanted to ask about the Teams’ environment. I had a chance to see your 2.0 at Enterprise Connect and I was really interested in that. We have also heard anecdotally that Teams Phone are really slowing. I am sure that’s due to the macro in general. But I wonder if you are seeing any impact on that in terms of your upside opportunity to sell the turnkey Ring UCaaS solution versus opportunities to sell into Teams as your own app inside Teams. I appreciate any color on that? Thank you.

Mo Katibeh

Thanks, Ryan, and thanks for coming by and checking out the demos. Right now our — as we have said in our prepared remarks, we are seeing strong growth with our Teams 1.0 business, if you will, over 100% seat growth year-over-year.

As we think about Teams 2.0, it really is an opportunity to drive traction with what is already a fairly substantial Teams’ base through a significantly improved experience versus what we offer in our 1.0 product, and frankly, as Vlad pointed out, what other competitors in the market are offering.

And our motion there is really about targeting E1 and E3 users that don’t have a Teams Phone license and constitute the vast majority of the Teams users that are out there. And this plays directly into our BAU sales motion, if you will, where as part of the discovery process, we are talking to our customers about what solutions they are using today.

Are they on an on-prem legacy solution? Some of them may tell us that they are a Teams user and to the degree that they are a Teams user, then we pivot into offering the value and the benefits of our integrations, our analytics, all frankly, at one simple valuable price. And then to the degree that a customer needs contact center as well, CCaaS, we are able to integrate that and bring that to life.

So to simply answer your question, there’s a fairly material number of Teams users out there today. We continue to see that as a key growth opportunity for us moving forward and it only gets better with our 2.0 solution.

Operator

The next question comes from Brian Peterson with Raymond James. Please go ahead.

Brian Peterson

Congrats on the strong quarter, guys. So I just wanted to start on the enterprise in the top of funnel. I know you mentioned that ARR growth and the revenue growth in Enterprise was the delta there. What are you guys seeing in the top of the funnel that gives you confidence that, that enterprise will step up in the back half of the year? Thanks, guys.

Mo Katibeh

Thanks for the question, Brian. Appreciate it. As we think about the top of the funnel, our lead flow is still quite strong. And as I mentioned a few minutes ago, we are seeing broad acquisition strength across the Board.

The dynamic that’s in play and quite obviously driven by the macro environment, is the upsell-down-sell, two sides of the same coin are impacting our enterprise business. And so as the macro improves, our ability to sell our traditional product set into the enterprise, organically, will improve with it, one, and then two, and obviously, this takes a little bit longer.

But as you think about the new innovations that Vlad articulated, they become new cross-sell, upsell opportunities, as well as an acquisition of wedge strategy, if you will, the ability to go sell these new products as a standalone and then pull through our UCaaS and CCaaS solutions along with it. So those are the dynamics that are playing out. Thanks for the question.

Operator

The next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Matt Niknam

Hey, guys. Thanks for taking the question. I am just curious if you can talk about the cadence of bookings over the course of the quarter, and more specifically, I guess, was there any drop off in March or any spillover into April? And then just one quick follow-up on small business ARR, obviously, very resilient. I am just wondering if you can comment on what’s driving the relative resiliency there maybe relative to just midsize and enterprise? Thanks.

Sonalee Parekh

Sure. Hey, Matt, Sonalee here. I will take the first part of the question and then I may hand over to Mo just on — specifically on SMB. So in terms of linearity on bookings, as you know, we don’t guide specifically on bookings, but I think in the current environment, it is worth giving you some color.

I won’t speak specifically month by month, but yes, we did see much more back-end-loaded bookings. So March was the lion’s share of bookings for this quarter. And as you know, we have guided or given some color last quarter around ARR growth being higher than total revenue growth for the full year and we still expect that to be the case.

And as you know, enterprise bookings anyway tend to be more back-end loaded. So we are seeing more of that trend in the current environment. So I will hand over to Mo just on who can talk to the SMB trends.

Mo Katibeh

Yeah. So thanks for the question. As you think about the opportunity to close cycle time dynamics, we articulated that we are still continuing to see elongated cycle times vis-à-vis Q1 of last year.

Now as you think about SMB/SOHO and SMB Space, obviously, that opportunity to close is significantly faster. And one of the dynamics that played out for us during the quarter was, frankly, very good execution by our marketing organization that we have talked about historically that we were going to rationalize brand spend, we are going to improve the efficacy of our marketing demand gen motion and that is playing out.

With the less, they were able to drive more pipeline. That pipeline closes fairly quickly down market and is one of the reasons that you are seeing the strength in the numbers that we were able to put up. Thanks for the question.

Operator

The next question comes from Peter Levine with Evercore ISI. Please go ahead.

Peter Levine

Yeah. Thank you for taking my question. Yeah. Maybe Mo one for you is, you called out Avaya reemerging from bankruptcy, and I guess, you would have seen some kind of impact from the channel. Was there — I mean I guess when they were in bankruptcy, was there an impact in the first half, and then if so, can you maybe quantify what that impact was? And then maybe second, certainly, ARPU above $30 million. Can you maybe dissect what core UCaaS pricing looks like if you were to exclude contact center from that number? Thank you.

Mo Katibeh

Thanks for the question, Peter. So to talk about Avaya, look, they just emerged from bankruptcy a few days ago at the very beginning of May. As we have said before, we are expecting that their contribution will ramp in the latter part of this year, obviously, tied to putting the restructuring behind them.

We are comfortable that the contractual provisions that we have in place are going to allow us to achieve the minimum commitment volumes that we talked about last quarter, as well as the enablement of new go-to-market motions including wholesale, integrations, additional integrations that we are building tied to Avaya legacy contact center, et cetera, et cetera.

And frankly, to the degree that they are not able to achieve those commitments, if that ever happens, then we are comfortable that there’s mechanisms in place to address that as well. So, with that, Sonalee, I will turn it over to you to talk about ARPU.

Sonalee Parekh

Yeah. Thanks for the question, Peter. So as you know, we look at and run the business and disclose ARPU on a blended basis and I am happy to say that the trend was stable there. As you know, CCaaS has higher ARPU, a significantly higher ARPU than UCaaS.

But even when you take out the CCS number from overall ARPU, they are generally holding steady. There was a little bit of weakness in UCaaS relative to CCaaS, but it’s very, very mild. Overall, very stable and stable within a range. And there was some of that was actually, to be clear, some of the softness was FX, but it was very marginal.

Mo Katibeh

Yeah. Spot on. Yeah.

Sonalee Parekh

And no material change.

Operator

The next question comes from Michael Funk with Bank of America. Please go ahead.

Matt Bullock

Hi. This is Matt on for Mike. Thanks for taking the question. It’s great to hear that the demand environment is broadly holding up. Can you call out any incremental strength or weakness you saw in specific verticals this quarter?

Mo Katibeh

Yeah. Thanks Matt for the question. As we have talked about in previous quarters, the strength that we are seeing relative to verticals really ties back to areas that are very focused on what we call business to consumer, a.k.a., verticals and companies that sell or service end consumers as their customers.

So healthcare, financial services, retail, professional services, public are generally the areas that value UCaaS and the services that we provide, frankly, because voice reliability, service uptime, et cetera, has got to be rock solid, because it’s the difference between happy customers driving revenue, et cetera. Those are still the verticals that are doing really, really well for us and provide meaningful opportunity as we look ahead.

Operator

The next question comes from Matt Stotler with William Blair. Please go ahead.

Matt Stotler

Hi, everybody. Thanks for taking the question. Maybe just a follow-up and maybe this one for Mo, but it’s based on something Sonalee mentioned earlier. And so we talked about last quarter was some efficiency improvement initiatives around partners specifically and shipping incentive structures and those relationships. Just maybe give an update on the level of acceptance you are seeing with those changes at partners and then any kind of early indications on the impact on productivity of the relationships?

Mo Katibeh

Very good. Broadly, we did not see any impact year-over-year relative to our partnerships tied to the changes that we have made. As we disclosed last year, I am sorry, last quarter, ALE and Atos are no longer exclusive. We remain partners with them, they continue to have a large on-prem base and they are going to be compensated as seats are sold.

That’s generally the model that we have been targeting, that model we find drives the right incentive structure and behavior, and then broadly from our channel partners, we are continuing to see the lead flow is steady and no meaningful change quarter-over-quarter.

The only other comment that I’d make and going back to my prepared remarks is the launch of what we are calling the RingCentral Ignite program. We have had a variant out there for a while, but we are really putting some — we are behind the arrow, if you will. And what this program does is serve as another way for us to help continue driving our sales and marketing percentage of revenue in the right direction over time.

And how does it do that? One, it provides economic incentive for our partners to take on more of the sales and marketing motion themselves and not include our own direct sales base. This is a great motion, many of our channel partners have longstanding relationships with on-prem legacy customers that they are now able to go work with, move them over to RingCentral and do it without any additional incentive. This drives economic benefit for all parties, and early days, but we are seeing very solid interest from the channel partner community about this motion as well.

Operator

The next question is from Ryan MacWilliams with Barclays. Please go ahead.

Unidentified Analyst

Hi. This is Dan Cogman [ph] on for Ryan MacWilliams. Thanks for taking my question. I was just curious how your renewals fared in the first quarter maybe compared to the fourth quarter and if you have seen any changes in these customer renewals as a result of macro.

Mo Katibeh

Well, we don’t guide on renewals, but what I will bring you back to is a comment that Sonalee made, which is we are seeing the churn as a percentage is stable and doing well. As we mentioned, in the enterprise space, upsell and down-sell, frankly, two sides of the same coin. There is some pressure on the down-sell side at the renewal time frame as our enterprise customers who have been impacted themselves by the macro are doing some degree of rationalization of seats tied to their own needs. But again, broadly speaking, the churn percentage has remained stable quarter-over-quarter, year-over-year.

Operator

The next question comes from Catharine Trebnick with Rosenblatt Securities. Please go ahead.

Catharine Trebnick

Oh! Thank you for taking…

Operator

It looks like we have left our connection to Catherine. The next question comes from Terry Tillman with Truist. Please go ahead.

Bobby Dee

Great. Thanks for taking the question. This is Bobby Dee on for Terry. Just one on contact center. For those larger million-dollar-plus deals, is contact center attached still in the over 60% range or has there been any notable up or downtick in attach year-to-date? Thank you.

Mo Katibeh

Stable. We are continuing to see our $1 million-plus TCV deals have more than 60% attach of CCaaS and really this boils back to what we have seen historically, which is in the legacy UC-CC base, about 60% of all of the CC seats sold were from the same vendors that were selling UC to those customers.

It’s a very obvious buying motion. It drives significant economic benefits to customers, as I laid out in my prepared remarks, recently validated by Forrester, an independent third-party consulting company.

Operator

Today’s last question comes from Michael Turrin with Wells Fargo Securities. Please go ahead.

Michael Turrin

Hey, there. Thanks for sneaking me in. Sonalee, I just want to go back to margin. You are unlocking a lot of margin expansion in fairly quick order. You had some useful commentary around the sustainability of those improvements. Is there anything you can add around how you ensure you are driving the right level of optimization and still leaving enough in the tank for growth to hold in above double digits going forward as well, just curious on how you manage the balance through this? Thanks.

Sonalee Parekh

Yeah. Sure. I mean, you have heard us say that we are focused on driving healthy, profitable growth. So we absolutely are and always will be a growth company. What I said in previous calls and tried to reiterate today is, we are seeing the benefit of scale in the model.

We are actually seeing the profit potential of the business model starting to shine through and that’s from lots of efficiencies we found within the workforce, within optimizing our cost of customer acquisition.

And you may remember last quarter when we talked about the actions we were taking, we were very specific not to touch frontline salespeople and that is something that is still very much part of the RingCentral playbook in terms of becoming significantly more profitable and significantly more cash generative. We are protecting the P times Q selling motions within the portfolio.

And some of the things that we have talked about, Mo was talking about lowering customer acquisition within the channel, I talked about vendor consolidation, reviewing contracts, rationalizing licenses, being disciplined about expense, being disciplined about hiring in some of the G&A areas where we still have a bit of work to do, but we feel like we have come a long way.

So what I would say is that, we feel like we are getting the balance right and I very much believe that we need to invest for growth. And one of the great things about optimizing your cost base is it frees up cash to be able to invest in future and that’s what this team will be focused on.

Operator

Thank you all. And that concludes our call for today. You may now disconnect.