RingCentral - Q2 2024

Transcript

Operator (participant)

Welcome to the RingCentral second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Will Wong, Vice President of Investor Relations. Please go ahead.

Will Wong (VP of Investor Relations)

Thank you. Good afternoon and welcome to RingCentral's second quarter 2024 earnings conference call. Joining me today are Vlad Shmunis, Founder/Chairman and CEO, and Sonalee Parekh, CFO. Our format today will include prepared remarks by Vlad and Sonalee, followed by Q&A. We also have a slide presentation available on our Investor Relations 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 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 comparison. 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'll turn the call over to Vlad.

Vlad Shmunis (CEO)

Good afternoon and welcome to our second quarter earnings conference call. We had a solid second quarter, as results were above the high end of guidance on all key metrics again this quarter. Total revenue rose 10% to $593 million, $7 million above the midpoint of our guidance. We saw good traction with our new products, in particular with RingCX, our native AI-first cloud contact center product. RingCX traction was solidly above our expectations. Importantly, we also delivered another quarter of expanding profitability and strong cash flows. Sonalee will provide more details shortly, but some key highlights include achieving an operating margin of 20.9%, which was above our guidance, driving down SBC by 5 percentage points year-over-year, and generating $109 million of leverage-free cash flow, a quarterly record. We see our business as being comprised of three major customer groups.

These are large businesses or enterprises, which are customers that generate over $100,000 ARR, and which represent about 40% of our total ARR. Mid-market, which are customers that generate between $25,000-$100,000 ARR, and which represent about 20% of our total ARR. And small businesses, which are customers with less than $25,000 ARR, and which represent about 40% of our total ARR. Our results reflect continued strengths in our core UCaaS business across all customer groups. Our enterprise business continued the trend of double-digit year-over-year growth in Q2. We are also seeing growth in the average enterprise deal size on both acquisition and upsell. We closed around 20 deals with over $1 million TCV or total contract value in Q2, which was in line with the number of such deals in Q2 2023. Importantly, the average TCV of large deals grew by 30% year-over-year.

As we have seen the last few quarters, many enterprise customers want our deep Teams integration. In fact, more than half of our large deals this quarter were again to customers that are utilizing our solutions integrated with and alongside Microsoft Teams. This is a key differentiator and an important reason why we win. We see Teams as a tremendous opportunity to grow our presence with the many large enterprises that use it for collaboration, but are also in need of best-in-class telephony. Within enterprise, we also continue to see strong traction in our gold verticals, which include healthcare, financial and professional services, retail, and public sector. Given the mission-critical nature of voice in these industries, we are uniquely positioned to disproportionately capture the opportunity in our gold verticals. We estimate this opportunity represents at least 100 million on-prem seats that we expect to move to the cloud over time.

In past quarters, we have discussed our large enterprise wins in financial services and healthcare. This quarter, I want to specifically call out the significant strengths we are seeing in the retail sector, which we believe comprises nearly one-third of seats in our gold verticals. Last quarter, we announced the largest win in our company history. This was a 40,000-seat win with our flagship cloud PBX UCaaS RingEX product with a large Fortune 500 retailer. This quarter, we won two 10,000-plus seat deals in the retail vertical as well. The first is a large retailer with hundreds of stores across Europe that purchased 13,000 RingEX seats. The second is a well-known retailer in the Asia-Pacific region that purchased 11,000 RingEX seats, the largest APAC deal in our company's history.

These customers selected RingCentral because of our combination of vertical-specific integrations, deep Teams integration, proven ability in solving complex use cases, and, critically, best-in-class reliability. In our small and mid-market customer groups, we are seeing early signs of stabilization despite a continually challenging macro. This is due to our ongoing focus on customer support experience, as well as our transition to a multi-product portfolio company, which allows us to get greater wallet share from our sizable SMB base. Looking ahead, we believe these improvements should drive net retention and growth higher. So why did we win? Our success is driven by our differentiated strategy of trust, innovation, and partnerships, or TIP, as we call it. First, trust. We achieved 99.999% uptime for the 24th straight quarter, and our carrier-grade reliability, combined with our secure, standards-compliant, and battle-tested platform, continues to be a key differentiator.

It is one of the reasons why Whirlpool, a Fortune 500 manufacturer, selected RingCentral this quarter to power communications at its U.S. manufacturing plants. The company purchased 5,000 RingEX seats and selected us for our ability to deliver a cloud communications platform that is reliable, easily deployable, and scalable. Innovation. The past 12 months have marked one of the most innovative periods in the company's history. In this short time, we launched RingSense, our AI platform, RingCX, our native CCaaS product, RingSense for Sales, our conversation intelligence offering, and RingCentral Events, our hybrid events product. This has transformed us into a multi-product portfolio company. We're seeing strong early momentum across all our new products. In February of this year, we set a target of achieving at least $100 million of exit ARR from our new products by the end of 2025.

Six months in, these products are already having a positive impact on our growth, and I'm confident we will achieve this target. Let me provide more detail on the traction we're seeing with each new product. First, RingCX. We're seeing strong demand for RingCX, which now has over 350 customers, up more than 70% sequentially. RingCX's net new bookings nearly doubled in Q2, delivering a higher average revenue per account. This ARPA expansion has been largely fueled by over 25% of our $1 million-plus TCV deals, now including both RingEX and RingCX. RingCX wins because it is a modern, AI-first product that is natively integrated with our industry-leading RingEX UCaaS solution. RingCX is reliable, easy to deploy and use, and is disruptively priced. In Q2, the rapid pace of innovation continued as we added more than 300 additional features, including integrations with ServiceNow, HubSpot, and, importantly, Microsoft Teams.

Notably, in Q2, we rolled out RingSense for RingCX, a premium add-on which provides AI-powered quality management and conversational analytics. This product is currently in the controlled availability phase of its rollout. However, we're already seeing strong early traction, with nearly two-thirds of our 1 million-plus TCV deals that included RingCX also attaching RingSense. When RingSense is purchased alongside RingCX, our combined list price is roughly $100. A good example of a combined RingEX, RingCX, and RingSense win last quarter is a large county in the Midwestern United States. The county, one of the 25 largest in the U.S., purchased 5,000 RingEX seats and 500 RingCX seats, as well as added on RingSense for RingCX. The county will use RingEX to power communications for its workforce and RingCX to power its contact center, allowing seamless collaboration across departments such as treasury and elections.

The county is also a great example of a major win in the public sector, one of our key gold verticals. Building on the RingCX momentum is our recent announcement that Vodafone will be reselling RingCX, the first major GSP to offer RingCX to its global customer base. With all the great early traction we're seeing with RingCX, we also continue winning with our up-market RingCentral Contact Center product, which targets customers with more complex use cases. During the quarter, we significantly increased our presence with a multinational travel and leisure firm and a large global healthcare organization. We also added two large credit unions to RingCentral Contact Center customers. Many enterprises, especially in our gold verticals, where voice is mission-critical, demand best-in-class UCaaS closely integrated with a strong CCaaS solution. RingEX, combined with RingCentral Contact Center, is a unique deep integration between two Gartner Magic Quadrant leading products.

For customers looking to streamline workflows while leveraging the power of AI, we have the RingCX combination to offer. In either case, reliability, scalability, security, global reach, standards compliance, depth and breadth of integrations, and their robust feature set are table stakes. RingEX with RingCX and RingEX with RCCC check all of these boxes and continue to be unique in doing so. Our total contact center business now stands at $390 million of ARR, up 19% year-over-year. Now, moving on to RingCentral Sales. We now have over 800 customers with net new bookings almost tripling sequentially. Customers choose RingCentral Sales for its ability to record and summarize conversations, provide AI-powered coaching, deliver insights on what customers care about most, and allow managers to have a comprehensive, easy-to-access view of the team's performance.

For example, Tarrytown Expocare, the largest IDD-focused pharmacy in America, reported that it is now able to review 100% of their customer calls, thus realizing significant productivity gains. Continuing with our strong innovation cadence, in Q2, we introduced a new integration with Microsoft, which now captures and creates insights from Teams conversations. This, combined with our integrations with leading CRM tools such as Salesforce and HubSpot, allows our customers to keep track of all their interactions without needing to toggle between applications. Now, onto RingCentral Events. Customer count was up over 30% sequentially, with bookings growth of over 40% sequentially. New wins included a large six-figure deal with a leading global management consulting firm, one of the world's largest aerospace companies, and a large global personal computing company.

On the innovation front, we introduced a new LinkedIn integration, which allows users to directly register and share events all within LinkedIn. With the traction we're seeing across all our new products, we believe we can attract new customers as well as increase upsell to our existing base, which is a key driver of net retention. We will be providing you with periodic updates on our new products as we achieve certain milestones. Back to TIP. Last but not least, partnerships. As we scale our business, we will continue to leverage our expansive and differentiated go-to-market ecosystem. This ecosystem, which includes channel partners, strategic partners, and global service providers, combined with our direct selling motions, allows us to have access to multiple segments, verticals, and routes to market.

It has been key to our success and an important part of our competitive mode that allows us to successfully scale our multi-product business. Let me now give you some highlights from the quarter. First, GSPs. Our GSP business again grew faster than our overall business and now represents over 10% of our total ARR. Our network of GSP partners and deep engagements that we have built with them on both product and go-to-market are unmatched by our UC and CC peers. Today, I'd like to warmly welcome Cox Communications, the largest private broadband provider in the U.S. and a comprehensive technology provider for businesses, to our growing GSP family. Cox selected RingCentral to support their future UCaaS and CCaaS solutions, with plans to launch UCaaS later this year. Cox provides us with another meaningful channel to help move more on-prem customers to the cloud.

We now have a network of 14 GSP providers in total, including two MSOs, as Cox followed the successful rollout of Charter in late 2022. Our presence and expansion with the leading GSPs in Europe is key to scaling our international presence. In this vein, as I already mentioned, Vodafone recently announced that it will be reselling RingCX to their user base. We also continue to expand into new geographies with Vodafone. For example, in the second quarter, we launched in Ireland and already won a sizable deal at Smyths Toys, one of the country's largest toy retailers. We expect to have access to a total of 30 global markets through Vodafone by 2025, up from 20 today. Now, onto strategic partnerships. First, Mitel. In Q2, we acquired certain additional assets and customer relationships related to Mitel's MiCloud Connect and Sky UCaaS platforms.

While we have migrated hundreds of thousands of Mitel's cloud seats already, we expect that this will allow us to provide a better customer experience for their remaining cloud base in their customers' digital transformation journey. Moving forward, RingCentral and Mitel will be non-exclusive partners. Now, onto Avaya. Earlier this year, we announced an extension of our relationship. We're already seeing good renewed traction, including with several of Avaya's top customers who are going through their digital transformation. This includes a recent large win with one of the busiest commercial ports in North America, as well as another win with an auto retailer with locations in all 50 states. In Q2, we also jointly announced a new hybrid solution that allows customers to integrate their existing Avaya on-prem products with RingCentral's cloud messaging and video solutions.

This hybrid approach will enable Avaya's customers to transition to Avaya Cloud Office powered by RingCentral or ACO at their own pace by allowing employees from the same company to use either Avaya or on-prem product or ACO to power their calling. Meanwhile, they can use RingCentral's AI-powered cloud messaging and video capabilities for digital collaboration. We believe our opportunity with Avaya remains significant and that we're well-positioned to drive the transition of Avaya's large UC base to the cloud. In summary, Q2 results were a continuation of the strong execution that we saw in the first quarter. Demand in our core UCaaS business remains solid. Our new products are gaining traction, our pace of innovation is quickening, and we're expanding our partnerships. We're doing all this while continuing to improve profitability, reduce stock-based compensation, and grow free cash flow and free cash flow per share.

We believe this will generate value for all our stakeholders over time. We are on an exciting path, and I'm confident that we can continue to execute in the quarters and years ahead. With that, let me turn the call over to Sonalee.

Sonalee Parekh (CFO)

Thanks, Vlad. I'll provide highlights from the second quarter and then discuss our business outlook for the third quarter and full year. In Q2, subscription revenue of $567 million was up 10% year-over-year, solidly above the high end of our guidance range. ARR of $2.43 billion was up 9% year-over-year. Adjusted for constant currency, ARR was up 10% versus last year. CCaaS ARR was $390 million, up 19% versus last year, with good early traction from RingCX. As Vlad noted, the number of large TCV deals was roughly flat versus last year, but the value of each deal was up on average 30%.

Additionally, the value of our large UCaaS-only deals grew even faster, up over 60% versus last year. While the macro has impacted growth the last 2 years, we believe our business is stabilizing, and our large UCaaS wins and growth in deal size are illustrative of the size of the opportunity that is still in front of us and an encouraging leading indicator of continued market adoption. Now, moving to profitability. I'll be referring to non-GAAP results unless otherwise noted. Subscription growth margin was 81%. Overall, our ARPU was again above $30. Our new product ARPUs are solidly higher than current overall ARPUs. Over time, as the contribution from new products grows and its penetration within our large base increases, we expect new products to become increasingly accretive to overall ARPU. Operating margin rose 160 basis points year-over-year to 20.9%, which is above our guidance.

The outperformance was driven by revenue outperformance and continued discipline around spending. Sales and marketing expenses as a percent of total revenue declined 150 basis points to 39.5% as we drive higher sales productivity and remain focused on keeping compensation commensurate with the value created. This continues to be an area of focus for the company, and we expect to drive further incremental improvements in the second half of this year. Importantly, we are able to drive margin expansion while continuing to reinvest back into the business to support innovation and growth. Moving to free cash flow. In the second quarter of 2024, we generated free cash flow of $109 million, up 49% versus last year. This includes interest of $8 million, restructuring and other payments of $3 million, and cash received from strategic partners of $10 million. Moving to stock-based compensation.

Stock-based compensation fell 470 basis points versus last year to 15% of total revenue. We remain disciplined on stock grants. As we have said before, reducing SBC is a key priority for the entire management team. As of the first half of 2024, net new share grants are down almost 60% versus last year, which is ahead of our previously stated goal to reduce share grants by 50% of 2023 levels. We have also again improved our SBC outlook and now expect SBC as a percent of total revenue to be 15.7% in 2024, ahead of our prior guidance of 16.1% last quarter. Importantly, free cash flow exceeded stock-based compensation for the first time ever this quarter.

This is a testament to the progress we have made to both reduce stock-based compensation as well as significantly grow free cash flow through operating leverage from our large and growing ARR base, along with continued focus on disciplined spend and efficiency initiatives. Moving to our balance sheet and capital allocation. We have made great progress in strengthening our balance sheet over the last 18 months, with net debt to adjusted EBITDA declining from 4.3 times at Q4 2022 to 2.4 times at Q2 2024. In fact, Fitch Ratings recently upgraded its outlook on RingCentral from stable to positive. This upgraded outlook was based on our low and improving leverage, potential for future expansion and EBITDA margin, and free cash flow growth.

Going forward, we will continue to employ a balanced and disciplined approach to returning cash to shareholders through both debt repayment and share repurchase, while also remaining flexible in considering inorganic growth. Allocating capital between these priorities will be based on driving a high ROI for our shareholders, while also preserving financial flexibility. With this framework, let me give you some color on how we plan to allocate our capital. We plan to address our $161 million 2025 convertible notes outstanding at June 30, 2024, with the incremental free cash flow we expect to generate between now and March 2025, reducing our gross debt by approximately 10%.

We intend to address the remaining balance of the 2026 convertible notes with cash on hand, a portion of the free cash flow generated between now and March 2026, and access to bank lending markets given our strong and improving financial and credit profile. Regarding buybacks, we believe that share repurchase currently provides an attractive relative return. As of June 30, 2024, we have repurchased 4.8 million shares and paid $162 million for share repurchases under the plans previously authorized by our board of directors, resulting in our fully diluted share count declining by approximately 1 million shares this year. We have approximately $326 million remaining on our total authorization at June 30, 2024. Importantly, we are targeting to reduce our gross debt from $1.5 billion today to no more than $1 billion before the end of 2026.

We also plan to continue to at least fully offset dilution from SBC via buybacks, all while preserving financial flexibility with respect to excess cash. Now, let me turn to guidance. Embedded in our guidance is the expectation that the macro environment and current business trends remain relatively stable, with no further material improvement or deterioration in conditions. With that backdrop, for the third quarter of 2024, we expect subscription revenue growth of 8%, total revenue growth of 8%, non-GAAP operating margin of 21%, and non-GAAP EPS of $0.92-$0.93. For the full year, we are raising our revenue outlook. We now expect subscription revenue of $2.282-$2.288 billion, representing growth of 9%, and total revenue of $2.393-$2.399 billion, representing annual growth of 9%. We continue to expect a non-GAAP operating margin of 21% as we balance profitability with reinvesting back into the business.

Importantly, we now expect stock-based compensation as a percentage of total revenue to be 15.7% at the midpoint, down from 16.1% at the midpoint previously. We also expect non-GAAP EPS of $3.62-$3.67, up from $3.59-$3.67, as we now expect 95-96 million fully diluted shares outstanding in 2024, down from 96-97 million shares previously. Regarding free cash flow, we now expect free cash flow of $395-$400 million, up from $385-$390 million. Our outlook continues to include capitalized expenditures of $85 million, cash paid for interest of $60 million, and restructuring and other payments of $20 million, as well as $25 million of cash received from certain strategic partners. In summary, we had another strong quarter.

We are executing against our strategy of delivering durable, profitable growth and value from our core, expanding our addressable markets through new products and driving continued free cash flow generation while materially lowering SBC. We believe this is the right strategy that will maximize returns for all stakeholders and look forward to continuing to execute strongly against it. With that, let's open up the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. In the interest of time, we will limit the Q&A to one question per analyst. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Funk with Bank of America. Please go ahead.

Michael Funk (Senior Equity Analyst)

Yeah, thank you for the question tonight. One for you, Vlad, kind of a higher-level industry structure question. Industry structure really isn't static, right? You see a number of providers add capabilities, whether it was Voice or Contact Center last several years. You've clearly expanded your own product portfolio. So love to hear your thought on why RingCentral will be a share consolidator if you believe you can outgrow the industry and if your product portfolio will allow you to maintain pricing discipline to a greater degree than we have seen. And any metrics maybe you can provide to support that would be great.

Vlad Shmunis (CEO)

Thank you. Yeah, Michael, hi. Thank you for the question. So I'm sorry, just to make sure I understand, you're asking why we would or would not be a share consolidator?

Michael Funk (Senior Equity Analyst)

No, no, why you should be. Why you should be a share consolidator in UCaaS with your product portfolio and if and why you believe there can be greater pricing discipline as you add more products to the portfolio in the evolving competitive environment.

Vlad Shmunis (CEO)

Right. I don't believe we stated that we were planning to be market share consolidator, if that's what you mean. Our goal is to continue and double, triple down on profitable growth. So in as much as opportunities present themselves for us to accelerate growth and profitability, we will obviously keep an open mind to that. And we do evaluate opportunities as they come up. But having said that, we are quite happy with our internal plan and our internal progress at this point.

We are leading the market consistently in UCaaS. We are coming up strong in CCaaS. Our RingCentral's platform is gaining traction, and we have many happy customers on it now and growing very rapidly. Our new events platform is gathering major logos. All of this is under our own horsepower.

Sonalee Parekh (CFO)

Hi, it's Sonalee here. Just in terms of pricing and price discipline, obviously you saw we disclosed ARPUs remain above $30. Just a couple of points to make there on ARPU. So we have some opposing dynamics taking place. So one is our business is very successfully shifting more to enterprise. And you've seen some really big deals we announced this quarter as well as the last couple of quarters. And obviously, with those larger enterprise deals comes slightly more discounting. So that does have an impact on pricing.

But on the other side, that's being offset by new products, which in my scripted remarks, you would have heard me say, carry significantly higher ARPU. So those new products today are growing off of a very, very small base, but they will continue to ramp. And the other point I would just make there on pricing overall is we are less focused on ARPU per se and much more focused on ARPA, so average revenue per account, and how we drive greater share of wallet out of our 7 million-plus paid seat base. And I think that's where you'll see RingCentral really focus in terms of value proposition. And just to remind you on ARPUs around the new products, RingCX, we list at $65 per month per seat, so way above the corporate average. And RingSense for sales is about $60 per month.

But expect to see with more innovation comes higher ARPU and higher retention as well. So hopefully that answers a bit around the pricing.

Operator (participant)

Next question comes from Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi (Managing Director)

Great. Thanks for taking my question. And you guys talked about the RingCX traction that seems to be above your expectation. So could you talk about what kind of use cases you are seeing the traction? Where do you see the sweet spot? And how do you position yourself against the competitor in this cloud contact center opportunity? And then specifically contact center, you said CCaaS $390 million up 19%. How much of that growth also driven by the RingCX? Thank you.

Vlad Shmunis (CEO)

Okay. Right. So let me take this first part of the question. Look, RingCX is a modern AI-first contact center that is first and foremost seamlessly integrated with our flagship RingEX product.

So that is a huge advantage for RingCX because, as Sonalee just mentioned, we are the absolute leader in paid UCaaS seats at 7 million now and counting. And we have this very large captive base to mine to offer RingCX too. And RingCX, being designed for simplicity, ease of use, and deployment, and also being priced very disruptively, resonates well with our existing customers as well as a number of new prospects. So again, where it's resonating is integration, simplicity, of course, our core values of reliability, security, global reach. Now we shared about the fact that it will be available internationally, including via partnership with Vodafone. So I think that's a first for a product at this stage of development. So again, we feel very, very good about it. And Sonalee, maybe you can take the rest of it.

Sonalee Parekh (CFO)

Yeah. So in terms of how much of the growth of that 19% is being driven by RingCX versus RCCC, we don't actually break that out. But if you consider the number of customers we disclosed and the growth that we talked about in terms of net new bookings being more than 2x quarter-over-quarter and the customer growth being up 70% sequentially, you can see that we are very pleased and tracking ahead of where we were hoping to be. And although it's small today, over time, this will become a much more meaningful part of our overall contact center ARR. And already today, it's driving a significant portion of growth in contact center.

Operator (participant)

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

Meta Marshall (Managing Director)

Great. Thanks. Maybe, Vlad, you noted seeing stabilization in your end markets, but just wondered if you could, particularly since you were giving kind of a breakdown of the ARR by customer type, just any different trends that you're seeing between customer types or just international regions. Clearly seeing a lot of traction on new products, but just kind of a state of play of what you're seeing from a macro perspective. Thank you.

Vlad Shmunis (CEO)

Yes, I understand. Look, we're disclosing by customer size or customer group. You can see that our enterprise segment continues to be outperforming small business. That is not surprising given the macro environment that is still particularly punishing to small business. But we are actually quite pleased with our ability to stabilize even in that segment that is currently difficult.

And we and I fully believe that it will also return to healthier growth as the economy recovers. Okay? So that's as far as by size. As far as by geography, look, we continue to be predominantly a North American provider. But we have very interesting results. We announced a 10,000-plus seat deal in APAC, which is our largest. So definitely, we're seeing action there. We're getting good traction through a number of GSP partners. I think we announced a large win with Vodafone in Ireland. And I'm sure you noticed in our prepared remarks, we are well on track to be in 30 countries with Vodafone by the end of next year. So these are all very positive signs for us. And we think that there is a lot to be done, both domestically and internationally.

Operator (participant)

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

Brian Peterson (Managing Director)

Hi, guys. Congrats on the quarter. And thanks for taking the question. So, Vlad, I just wanted to expand on your momentum with GSPs. I'm curious, how should we think about the opportunity to expand that base over time? Are there more partners that you can build with? And as we think about the percentage of ARR, what do you think that could get to over the long term? Thanks, guys.

Vlad Shmunis (CEO)

Yes. Very good question. Look, our GSP practice is differentiated, but it's really unique. We have no other peer. This includes companies larger than us who have anything close to our GSP practice. I think we said we have, what, 14 GSPs now, and these count major logos like AT&T, Vodafone, Charter. Today, we've announced Cox Communications, British Telecom, Telus, list goes on.

So we already said that, and I think this is the first time that we've disclosed this, that their contribution at this point, I think we said it's around 10%. So that already obviously registers. And growth of that segment as a whole is actually a tailwind for us. Now, this segment grows in two ways: as we add new logos and as existing logos get our products through their channels and their sales forces, which are massive. So I firmly believe that GSPs is a core asset, that it is a very well-defined and a defensible mode for us, and that it will continue to be a growth driver for us in as much as it will be pulling our overall growth up. So could not be happier with welcoming Cox to the family and certainly expect more goodness from them and others.

Operator (participant)

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

Catharine Trebnick (Senior Research Analyst)

Oh, thank you for taking my question. Back to the GSPs and your traditional channel market. You've had a nice enterprise growth here. And are you getting more opportunities going up market through your traditional channel, or do you see this through the GSPs? Thank you.

Vlad Shmunis (CEO)

Yes. Short answer is it's the former. Most GSPs are positioning us for small, medium, and large, but not extra large. There are absolutely notable examples to the contrary. But if you think, if you look at the logos that we have, say, Charter, now Cox moving forward, they sell to smaller and medium-sized businesses. So yeah, it's for now mostly through direct as well as our traditional channels. So most of our enterprise leads come through traditional channel partners.

But as GSPs, who are, by the way, they tend to be some of the world's best logos when we count amongst our GSP partners, as they get more comfortable with our product, we are absolutely seeing possibilities to expand within each and every particular GSP within their own footprints.

Operator (participant)

The next question comes from Will Power with Baird. Please go ahead.

Will Power (Senior Research Analyst)

Okay. Great. Thanks. Yeah. Vlad, one of the, I guess, new announcements since your last call was the Microsoft Dynamics Contact Center announcement. I think you all probably have some interesting perspective. As you noted, you have a good relationship with Microsoft, or that's been a source of growth, working with teams, providing some of the underlying network capabilities. And of course, on the flip side, you're also increasingly pushing contact center, whether the NICE partnership or your own native approach.

I'd just love to get your perspective on how you think that maybe impacts you and/or maybe the broader industry too.

Vlad Shmunis (CEO)

Sure. Look, it's early, and it's early for us. And in a way, I don't want to speak for Microsoft, but it is a new offering for them as well. Look, we're very happy with our Teams integration. With our RingEX UCaaS product, I would absolutely not be ruling out us integrating with Microsoft Contact Center or others. We do view ourselves and pride ourselves on being an open platform. Having said that, one of the major benefits of RingCX, which is quite competitive and modern and forward-looking in every respect, in any case, but one of the main benefits when all is said and done is the fact that it is seamlessly integrated with RingEX, which is the market leader at 7 million paying customers.

And also, it delivers what people expect from RingCentral, which is reliability, security. I think I already mentioned that in one of the prior answers. So we absolutely think that there is room to coexist with Microsoft and not just with Microsoft Teams, but with Microsoft's other products. And again, look, vast majority of contact center seats, they're still on-prem. So Microsoft will get some, and we will get some, and other people will get some, and everyone will grow.

Operator (participant)

The next question comes from Mike Turrin with Wells Fargo. Please go ahead.

Speaker 10

Hey, thanks for getting me in. It's David. I'm dialing for Michael Turrin tonight. So the sub-revenue beat was actually larger than the prior six quarters. Would you mind just talking through some of the mechanics that worked there and how we should think about the potential impact for the rest of the year? Thank you.

Sonalee Parekh (CFO)

Sure. I'll take that. So yeah, in terms of what drove the revenue beat, which obviously we carried through, as you saw, in terms of how we guided. And you can also see what that is implying for the second half in terms of where we will land on top line and growth. But the key driver of the beat really was better-than-expected progress from our new products. So in particular, RingCX was above expectations. We also had another strong double-digit growth quarter in enterprise, which was ahead of expectations. And you heard Vlad earlier talk about stabilization in our SMB business, which we were really pleased about. One thing I would just mention is that overall, upsell continues to be impacted slightly by macro.

But on the other side of that, not only did we see strong traction and pricing with our new products, but also we saw deal sizes in the enterprise side of our business recover quite a bit. And actually, they were up 30% in the quarter. So as we look ahead, we were clear with how we guided for Q3, and you can apply the full year. We're not really factoring in any improvement or change in the macro. So it's really guiding based on what we see and the expectations we have today.

Operator (participant)

There are no further questions in the queue. With that, this concludes our call for today. You may now disconnect.