All righty. Good afternoon, everybody. James Fish with Piper Sandler, and now we start the afternoon post-lunch. Hope you had a good meal there. With us, we have Vaibhav from RingCentral. Thanks for joining us. Thank you for having me here. My first time, so looking forward to the conversation today. Yeah. We turned up the temperature for you outside, so it is a little hot out there now. But one of the questions that we are asking everybody, just to kick things off, is just the health of IT spending and what you are seeing. And you guys have this unique view in the sense of you have some large customers as well as down at the SMB kind of level. So I guess, what are you seeing on IT spending, and how is AI impacting how budgets are flowing? Yeah. That is a great question to begin with. So look, IT spending from what we are seeing remains healthy, is growing at the macro level. I think the color underneath is AI is definitely becoming a larger share of that budget, the existing budget and incremental budgets, if you will. I think what we are seeing is that customers are incrementally looking at solutions where they can drive real ROI. I think customers are beyond the experimentation phase, so they are looking for solutions that can drive outcomes, drive productivity, they can measure ROI. And then the third trend that we are also seeing emerge is customers want to buy AI from existing software vendors versus having to put point solutions together. And those are some of the trends we are seeing in the business frankly. Our demand is stable. No material changes in sales cycles. We anyway play in the communications and customer engagement space, which is mission-critical for our customers, and AI is rising to be a priority within that. That plays well into our strengths because for us, AI is natively integrated into our communications platform, and we are applying it through the entire journey of the communications life cycle. Overall, trends remain healthy. Demand, sales cycles are remaining healthy, and customers are increasingly focused on buying AI. Yeah, makes sense. I want to get to AI in a few minutes here, but one of the things that seemed to pop up here on the off-calendar earnings cycle was this notion around SMB top of funnel. As I said, you guys have a decent viewpoint into how SMBs are thinking about it. What are you seeing in terms of how SMBs are acting differently, potentially? How you are approaching that side of the market in terms of website traffic being impacted by AI and this sort? Yeah. Certainly there is an evolution in terms of how customers are discovering and evaluating software now with the lens of AI. We are evolving our investments and broadening our investments from the traditional, call it, search engine optimization, and we are investing or reallocating spend into making branding and content more available for AI-led search. Having said that, in our case, we have a multifaceted customer discovery process and motions wherein we go through the, obviously the search engines and the AI tools, but we also have a direct motion. We have a large customer base where we can go and upsell, and we have a large network of channel and global service carriers who help us get to the customers. In our case, while we are evolving the way we are discovering and reaching the customers, we also have a multifaceted motion. In fact, the SMB portion of our business is growing in double digits. There is strong demand, and it is a highly optimized motion for us. It is almost a Rule of 40 business. Got it. One of the more exciting parts, I think, to the RingCentral story here is you guys have 600,000+ customers. Meanwhile, you have a couple of new, I'll say, toys to play with between RingCX or ACE. How should we think about that opportunity, that white space opportunity within your install base? What sort of penetrations you and the team are kind of thinking about, not just for this year, but over the next couple of years here? Yeah, no, we are very excited. Look, one of the metrics we had disclosed at earnings was the cohort of customers or ARR of customers that have bought at least one paid AI product is 13% of the total base. So our total base is, call it, $2.5 billion+, so that mathematically gets you to $350 million odd. I guess there's a couple points there. The first point is, we are very early on. It's only 13%, so by definition, there's a long runway to be had. We are still in the early innings. The reason we provided that metric was to show the AI penetration, the customer adoption. To my earlier point, I think what we are seeing is customers are moving beyond experimentation now. They see real value in our products. They see value in AI being integrated and tethered to a platform versus having to stitch together multiple point solutions, if you will. So they are seeing the benefit of that, and therefore they're willing to pay for it. Within that cohort of customers, we are seeing higher net retention rates, higher ARPU, and it's being driven by the AI uplift for the most part. So we are seeing that. So there's a lot of runway ahead of us. We are still very early on. While AI is contributing to our growth today, it's growing off a small base, and it's small relative to the overall size of the business. So our expectation, and where we are working very hard, is to come out with products, innovate, and come out with a product suite that can address real use cases for customers so that that AI adoption grows, and over time, it'll become a more meaningful contributor to overall growth. Yeah. Is there a way to think about how much AI is an uplift here? The crux of my question is, we are getting this feedback as to if you take the 13% versus this point last year, the rest of the business seems still growing, but kind of flattish. How much of an uplift are we getting there and additionally, how do we balance the growth between AI versus that core business? Yeah. Both sides of the business are growing. The core business is growing in line with the market. We are continuing to maintain our number one market positioning in the UCaaS space. AI, the AI product portfolio is growing faster than that. It is a question of mix. The core product is about, call it 80% of our business. The AI products are still relatively young and still early in their contributing cycle. As adoption grows, as they become a bigger part of the mix, they have the potential to take the growth profile of the company up. Got it. How in your role are you trying to balance the growth initiatives versus the margin uplift? You guys have done arguably one of the top quartile in terms of software expansion of margins in the last few years. What is going on between the balance between the two? How are you using AI to help yourselves internally, and what is left to optimize in the business? Yeah. There are multiple questions there. Let me start with, we absolutely look at it as the power of and. We want to grow the business and expand operating margins and free cash flow at the same time. What is helping us do that is our recurring margin business. We have a very scaled recurring margin business that is producing 80% growth margins. That allows us to reinvest back into the growth of the company. There are structural drivers to expand margins and free cash flows over time. Where we are investing in growth is clearly AI and the new products, wherein one of the statistics we provided is we are investing over $250 million in R&D, a large majority of which is going into developing our AI products. So that's an example of where we are investing in the growth because the market opportunity is so large. The flip side to it is we also make sure that when we are investing the dollars, they come in with. We are focused on returns as well. So everything goes through a scrutiny of, we look at metrics like time to payback and LTV/CAC and customer lifetime value. So we are not just making investments, we are making bets on investments where we will get returns. So that's the first part of your question. The second part is where can we get more? How much more is left? Look, I think there are structural drivers in the operating margin profile of the company. For every $100 of revenue I'm adding, I'm getting $80 of gross margin, and the fixed cost base is not increasing in the same proportion as revenue. So the simple way of saying it is there's operating leverage in the business. Then we are also being very disciplined in terms of our cost profile. Headcount spend, vendor spend, and we are increasingly, that's the third part of your question, is we are increasingly using AI across the company. This past quarter, we made an announcement wherein we did a pilot with OpenAI, and we have over 2,000 engineers. All the engineers went through a case study alongside OpenAI, and everybody is trained in that organization. So over time, as AI takes hold, that will be an incremental driver of operating margins. Yeah. Maybe just a sell-sider to ask a tripart question there, by the way. You guys, speaking of partnerships, you guys actually just expanded your relationship once again with NiCE on the contact center side. Why the decision to kind of go back to that route, given you guys were looking at potentially the direct economics benefit with RingCX and, how do you think about now just the opportunity for RingCX within your install base? Yeah. So one way to frame the conversation is, so when you look at communications now, the idea for us is to have a complete customer engagement platform. What that means is being able to address all forms of communication, whether it's human to human, it could be human to a non-dedicated agent, it could be human to a dedicated contact center agent, or it could be human to an AI agent. The one trend we are seeing is customers are increasingly kind of looking for, a kind of integrated platform wherein they can orchestrate all these communications across a singular platform, if you will. So within that umbrella, RingCX is absolutely a strategic priority for the company. Where it plays well is in situations where customers are looking for a simpler solution. It's simple to deploy, it's easy to use, it's priced disruptively, and it is AI native. There are a lot of use cases wherein customers don't need all the bells and whistles of a full-on contact center, so that's where the product is doing well. As you rightly pointed out, we get owner economics. On the higher end of the market is where the NiCE solution plays, wherein customers are looking for addressing more complex use cases, when you have more distributed support organizations and whatnot. That's where the NiCE partnership plays in. The announcement that we made this past quarter was to announce a bilateral nature of the relationship. We've been selling their CXone product. Now they will start selling RingEX into their base. What that does is two things. It allows both companies to get access into the enterprise space, and it also allows customers more choice points in terms of getting an integrated UCaaS and a CCaaS solution. Yeah. Maybe along those lines, we're going to talk about competition here. Have you seen any change year to date or over the last year in terms of what's going on competitively? We hear all the time about standalone AI startups as well as whatever some of the CRM vendors are doing over the top and, of course, some of your more direct competitors. How are you guys thinking about the competitive level out there? Yeah, look, on the core UCaaS side, no material changes in the competitive. It's always been competitive, continues to be that way. We usually see Zoom and Microsoft Teams there. The way we differentiate ourselves is on the strength of the cloud voice solution that we bring that is highly reliable, secure, it's global, has hundreds of hundreds of integrations across the board. That's how we differentiate ourselves. Where we win is in customer bases wherein voice continues to be a primary mode of communication. There are a lot of use cases. Think healthcare, retail, financial services. These industries work on voice and texting. That's where we do well. In terms of AI, we come across both AI startup companies as well as the established vendors. When we go up against the AI startups, look, there's a lot of companies. Where we are winning against them is on scale. We have the scale, we have the infrastructure, which they lack. We have a large customer base and the strength of the R&D investment. Against the incumbent players, a lot of incumbent players may not have the entire suite of AI products. That is where we are trying to differentiate ourselves is provide a complete solution, communication, customer engagement with AI natively built and embedded. What about the RingCentral architecture, especially on the voice architecture, differentiates you guys? Yeah. Look, our voice infrastructure has been built over the last 20 + years. It has taken over two decades for us to get here, and the voice infrastructure has several unique requirements. It is a highly regulated industry in a lot of different markets. There are telco interoperability requirements that are there, and there are a lot of unique, like E911, emergency requirements that, billing and taxation requirements. We have architected this over the last two decades, and it has taken a lot of investment, and we believe that is a unique asset for us that is very hard to replicate, and it will not be, frankly, cost-effective to replicate as well. In terms of the architecture, think of us having the infrastructure layer, the communications layer. There is a lot of data that is flowing through the platform. In the past earnings, we have laid out some metrics around tens of billions of calls and billions of SMS messages that are going through the platform. Then AI is natively built, wherein it is getting applied throughout the life cycle of a conversation or interaction. Yeah. On that voice side, especially for business, almost a decade ago, I believe, when you joined, roughly, a large part of the RingCentral thesis was, we are the number one in UCaaS. We're getting now all these partners kind of shifting their on-prem endpoints to us. How did that play out in your view? What's left in terms of what's going to make that enterprise or SMB actually change at this point, if they haven't already? We went through a pandemic, and what's the next catalyst here on that side of it? Yeah. A few things are still true. We are still maintaining our number one market share in UCaaS positioning as per studies from Gartner. We've maintained that. I think I'll make maybe three points. One is on the go-to-market motions. Again, we have a multifaceted go-to-market motion strategy. We have direct sellers, we have over 16,000 channel partners, we have 16 GSPs, and then we have the partners that you mentioned. Each one of them are contributing to growth in their own way. We are not dependent on any one channel per se. The second point is there still continues to be a lot of opportunity. By many accounts, still tens of millions, hundreds of millions of on-prem seats that are still out there, and the catalyst for the change or those seats are already migrating at their own clip, but the catalyst will be AI. For customers to be able to benefit from AI, I think they'll have to migrate from on-prem to the cloud to be able to take that benefit. Is there a way to think about how some of these major partnerships are contributing to net new customers? Yeah, I think to my earlier point, look, they are all contributing. When you look at the metrics that we provided, GSP Partners, for example, that part of the business is growing in double digits. It is a Rule of 40 business. We announced a NiCE partnership, which is now bilateral. We are going to provide RingEX and their CXone solution into the base. So that will start contributing into the future. And then our direct and the channel motions are already contributing. Yeah. So we always talk about voice with you guys, but one interesting bit that you guys called out last quarter was SMS growing double digits. I guess, why now is it growing double digits? What is happening underneath? I think it was always growing double digits. It is a matter of we provided more color around it. And the color, frankly, is even when you think of our daily lives, when consumers are interacting with their providers, they are either calling or texting or SMSing. So SMS has always been a big part of our business. That volume of traffic has been growing, and it is going through our platforms. It is a, call it high converting channel, if you will. And AI is just improving how SMSs are being used. Now with AI is enabling businesses to understand the intent of SMSs, and you can personalize SMS messages. So I think that is a catalyst. And then, relative to us, because call, voice, and SMS messages are going through the same platform, it allows customer to get context across those two channels and get more intelligent outcomes, if you will. Makes sense. Yeah. So as we move down the P&L a little bit, one question we get is around gross margins, and how is AI going to impact gross margins versus the traditional seat-based model, as well, in terms of shifting from seat-based consumption? Yeah. So overall gross margins, we are holding at 80%, call it plus minus. Within that, our AI products are generally holding to the corporate average. When you look at gross margins for AI product, this is a function of pricing, the ARPUs, and the cost side. So maybe I will cover both. So on the ARPU side, look, we are very deliberate in terms of pricing decisions that we are making. The idea is value-based optimization, so customers are paying for the usage and the value that they are getting. Customers are willing to pay for these products because they are able to measure ROI, both from a cost as well as from a revenue standpoint. We provided several examples on our earnings around AIR, wherein customers are able to capture more leads. Those leads are converting to more revenue, and therefore, they are able to drive more customer growth and then reinvest back into the business, as an example. So that is on the pricing side. On the cost side, we look at the cost in terms of model selection. We are looking at inference efficiency, and we are looking at the infrastructure cost. Those are the three big pieces. In terms of the models, look, we are currently using frontier models. There are two dynamics that are happening. As inference is getting better across the models, the price per unit is coming down. Over time, there is a potential for us to use open source models, wherein the price again, the price differential is quite meaningful. We have not switched yet, but that is the potential to get price efficiencies. In terms of infrastructure as well as AI product scale, we will naturally see efficiencies across the infrastructure. So those are kind of the two or three drivers for gross margins. So at net net, we expect to hold gross margins at 80% + at the corporate level. Got it. What is left in terms of the low-hanging fruit? What is the structural operating margin of RingCentral here? Where do free cash flow margins get to over time? Look, we are very focused on expanding both GAAP as well as non-GAAP operating margins. If you look at our history, we had a big step function change one year, and then we have been steadily increasing between 100 to 200 basis points every year. Again, with the operating leverage and the structural discipline that we have put in the business and increasing use of AI across the company, my expectation is that we will continue on that path so there is more room to grow. Again, it is a function of the fixed cost. With 80% gross margin, the fixed cost base will not continue to grow. We are being very disciplined in terms of our hiring practices. We are off-shoring. Our vendor spend goes through multiple levels of scrutiny. With AI, I think the expectation is that the direction of travel will be up and to the right. Makes sense. I know you are not going to guide here for 2027. You obviously had some headwinds in terms of the last of the COVID-19 renewals coming in. Any puts and takes to think about as we start thinking about next year's growth rate? What you should expect for next year is durable growth. I think the COVID headwinds that we had talked about will start to kind of moderate next year. I think our expectation, certainly, is that AI will continue to kind of grow faster than the core business as AI gets integrated into the core portfolio. We are very focused on expanding margins and free cash flows. We will be disciplined and are, again, focused on getting to the 3%-4% target that we had laid out on SBC. You should see progress on that front as well as the 20% GAAP operating margin target. Yeah. Last one quickly, capital allocation. I think you surprised everybody with the dividend to start the year to a degree, I guess. What's the philosophy behind that, especially now that you actually increased it already mid-year? Yeah. It's just the confidence in the free cash flow profile of the company and the sustainability of that. Look, we've stabilized growth. We are expanding margins. Those margins are converting into free cash flows. We are using those free cash flows in a very disciplined and a smart way. The goal for us, frankly, is to optimize free cash flow per share. This year we've guided to over $7 of free cash flow per share, which is best in class amongst our peer group. Okay. Okay. Well, that's a good spot to leave it. Thank you very much for your time and all your inputs here. Thanks, everybody, for joining us. Thank you. Thank you. Thank you.