RingCentral (RNG) Q1 2026 Earnings Transcript

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DATE

Thursday, May 7, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• Founder, Chairman, and CEO — Vladimir Shmunis
• President and Chief Innovation Officer — Kira Makagon
• Chief Financial Officer — Vaibhav Agarwal

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TAKEAWAYS

• Total Revenue -- Approximately $644 million, up 5.3% year over year, and at the upper end of guidance.
• Subscription Revenue -- Approximately $623 million, up 5.6% year over year; customer additions remained steady with monthly net retention above 99%.
• AI Product Adoption -- Customers using at least one AI product exceeded 10% of the base, doubling year over year and growing double digits sequentially.
• Annual Recurring Revenue (ARR) for AI Customers -- More than doubled year over year and grew in double digits sequentially; these cohorts reported higher ARPU and net retention above 100%.
• Subscription Gross Margin -- Remained stable above 80% during the quarter.
• Non-GAAP Operating Margin -- Reached approximately 23%, up 110 basis points year over year, and at the high end of guidance.
• GAAP Operating Margin -- Achieved record of 7.8%, improving by more than 600 basis points year over year.
• Stock-Based Compensation (SBC) -- Declined 400 basis points year over year to 9% of revenue in Q1; full-year SBC expected to be about 9%, down from 11% in 2025.
• Free Cash Flow -- Exceeded $140 million for the quarter, up 8% year over year; per share, $1.62, up 15.4%.
• Full-Year 2026 Free Cash Flow Outlook -- Raised to approximately $600 million, representing 13% growth year over year.
• Dividend and Buybacks -- First quarterly dividend of $0.075 per share paid; 2.5 million shares repurchased for $81 million, with $418 million remaining under the authorization.
• Debt Reduction -- Addressed $609 million convertible maturity with undrawn Term Loan A, reduced overall debt by about $46 million, and lowered net leverage to 1.6x; no maturities until 2030.
• Q2 2026 Guidance -- Subscription revenue $628 million to $633 million; total revenue $648 million to $653 million; GAAP operating margin 6.6% to 7.6%; non-GAAP operating margin 23% to 23.2%; non-GAAP EPS $1.15 to $1.17; SBC $58 million to $62 million; share count about 87 million, down 6% year over year.
• AI Product Customer Metrics -- AIR had over 11,800 paying customers, up 40% quarter over quarter; ACE surpassed 5,200 customers, up 85% year over year.
• Customer Engagement Bundle (CEB) -- Launched and reached over 5,000 customers, nearly 40% of whom attach at least one paid AI product.
• Formal Contact Center Growth -- RingEX had more than 1,700 formal contact center customers, up over 70% year over year, with over half using AI products.
• 2026 Full-Year Guidance -- Subscription revenue $2.54 billion to $2.56 billion (growth 4.7% to 5.5%); total revenue $2.62 billion to $2.64 billion (growth 4.2% to 5%); GAAP operating margin 8.9% to 9.6% (up 450 basis points); non-GAAP operating margin 23.3% to 23.7% (up 100 basis points); FCF $590 million to $605 million (up 13%); diluted share count 86.5 million to 87 million (down 5% year over year); non-GAAP EPS $4.85 to $5.01 (up 13%); FCF per share $6.78 to $6.99 (up 18%).
• R&D Investment -- Annual spend exceeding $250 million, with an increasing share devoted to AI initiatives.
• New Product Innovations -- Introduced branded messaging via Reach Communication Services (RCS), enterprise branded calling, and expanded SMS support to 190 countries.

SUMMARY

Management confirmed record profitability with both GAAP and non-GAAP operating margins at new highs, underpinned by recurring revenues and improved cost discipline. The call introduced strengthened shareholder returns through the inaugural dividend and expanded buybacks, alongside reinforced guidance for ongoing margin, cash flow, and earnings growth. Substantial gains were noted in AI product adoption, with rising ARPU and retention rates among these cohorts. Multiple new product launches and expanding GSP partnerships were presented as drivers for additional monetization and competitive differentiation. Debt maturity was proactively managed, with further deleveraging planned, ensuring no refinancing risk until 2030.

• Management highlighted a differentiated hybrid AI–human platform, with end-to-end integration across voice, video, and messaging channels on a single system.
• The formal and informal contact center offerings were cited as supporting seat migrations from legacy on-premise systems, contributing to ARR growth.
• President Makagon described real-world use cases where AI tools eliminated lead abandonment and manual procedures, while driving improved customer satisfaction and business outcomes.
• Vladimir Shmunis said, "has a deep and defensible moat in an expanding market," emphasizing scale, platform reliability, and proprietary AI control as keys to defending share.
• GSP channel momentum remains early, with management stating contributions are "as expected" and the potential impact projected further into 2027–2028.
• Prospective long-term operating margin targets and reductions in SBC were discussed as supported by recurring revenue leverage, ongoing AI-driven efficiency, and tighter vendor management.
• Customer base diversification and the ability to offer all engagement tools natively, rather than relying on third-party integrations, were described as drivers of pricing flexibility and economic margins.

INDUSTRY GLOSSARY

• RCAI: RingCentral Agentic AI—RingCentral’s proprietary suite of agentic voice, virtual assistant, and conversation analysis AI solutions integrated across its communications platform.
• AIR: AI Receptionist—a RingCentral solution automating front-office customer communications through voice and text, deployable without developers.
• AVA: AI Virtual Assistant—a tool assisting human agents in real time with automation and workflow support during customer interactions.
• ACE: AI Conversation Experts—a module providing advanced conversation analysis and coaching to improve agent performance and insight.
• CEB: Customer Engagement Bundle—a suite providing informal contact center functions integrated into RingEX, including AI, SMS, and call queues.
• RingEX: RingCentral’s flagship cloud PBX platform, offering integrated business communications including voice, messaging, and video.
• RingCX: RingCentral’s full-featured, cloud-based contact center platform for formal contact center operations.
• GSP: Global Service Provider—a channel partner or carrier offering RingCentral products to its own customer base, acting as a distribution amplifier.
• RCS: Reach Communication Services—RingCentral’s branded mobile messaging solution delivering verified enterprise identity to customer devices.
• SBC: Stock-Based Compensation—periodic expense related to share-based payments, expressed as a percentage of revenue.

Full Conference Call Transcript

Vladimir Shmunis: Good afternoon, and thank you for joining us. We are off to a strong start to the year as we delivered another solid quarter with total revenue at the high end of our guidance. Importantly, we are also making meaningful progress in the quality of our operating model. We delivered record GAAP and non-GAAP operating margins, reduced stock-based compensation, paid down debt and returned capital to shareholders, including our first ever dividend. These are important milestones and reflect the business that is becoming more efficient, more profitable and more durable over time.

As to free cash flows, we now expect approximately $600 million of free cash flow this year, which is approaching $7 per share that we believe is among the best in our peer group. Moving forward, we plan to continue to reduce SBC with a path towards our medium-term target of 3% to 4% of revenue. And we are steadily building toward our goal of 20% GAAP operating margin in the next 3 to 4 years. Our strong financial performance is rooted in operational discipline that is underpinned by our unwavering commitment to innovation and a strong competitive position.

As one of the original cloud-native SaaS providers, we revolutionized customer communications by taking it from on-prem legacy infrastructure to the multi-tenant cloud. On the strength of that innovation, we've built a $2.7 billion ARR business that is growing, generating a healthy amount of cash and is returning value to shareholders in a meaningful way. RingCentral's original success was rooted in the convergence of broadband, mobility and cloud computing. We leveraged these megatrends to transform how hundreds of thousands of businesses and millions of users worldwide communicate with their customers. Today, we're at the start of an even bigger innovation namely AI, and specifically the rise of agentic voice AI.

AI builds on top of all the world-class assets that RingCentral has created over the years. It plays directly to our strengths. With our robust platform, massive amounts of rich data, omnichannel communication capabilities and global GTM and innovation at scale, we are well positioned to leverage AI as a key driver of our long-term growth and profitability. While agentic AI is very powerful and will be transformational to how businesses interact with consumers, our core belief is that it won't replace all humans. AI can and will do a lot and it will make remaining humans in the loop more effective.

RingCentral's secret sauce is to deliver agentic voice AI experiences at every stage of consumer-to-business interactions, while enabling businesses to get human agents involved at the right time. RingCentral's differentiated approach is to make both AI agents and human agents smarter by working together seamlessly, resulting in better customer outcomes and greater cost efficiencies. This hybrid human-in-the-loop model is where RingCentral excels. More specifically, our ability to orchestrate AI and human interactions at scale on a single platform across voice, text and video and do this at a global scale with industry-leading reliability, security and quality of service. This is our structural advantage and a defensible competitive moat.

RingCentral processes tens of billions of minutes and billions of calls and messages each year. As the front door to consumer to business interactions at scale, we are uniquely positioned to deploy AI across every stage of the journey before, during and after human involvement. We offer a modern end-to-end customer engagement platform spanning all consumer-to-business interactions. Our portfolio includes RingEX for Cloud PBX, RingCX and RingCentral Workforce Engagement Management or RingWEM for full features contact centers, and our recently introduced Customer Engagement Bundle or CEB for informal contact center capabilities. We embed agentic voice AI across our entire platform.

Our agentic voice AI portfolio or RCAI is currently comprised of AI receptionist or AIR and AIR Pro, which automate customer interactions from the get-go; AI Virtual Assistant or AVA, which assist the human agent in real time; and AI Conversation Experts or ACE, for deep conversational analysis and coaching. Overall, we are good at helping businesses connect with more customers, resolve issues faster and more cost effectively, capture more leads and make remaining human agents more effective. Adoption of our AI product portfolio is strong. Customers using our AI adopt more products, spend more with us and stay longer, driving higher ARPU and net retention well above 100%.

ARR from customers who utilize at least one of our [ Ring ] AI products, which we refer to as our key AI utilizing customers, has more than doubled year-over-year and is growing in double digits sequentially with favorable ARPU and retention metrics. Kira and Vaibhav will provide more details. In summary, I'd like to leave you with these 4 takeaways. First, RingCentral has a deep and defensible moat in an expanding market. We have built a carrier-grade communications platform with the scale, reliability and trust required for mission-critical customer interactions. As AI expands the scope of customer engagement, we believe that our market opportunity is only getting larger, and we are uniquely positioned to capture it.

We are currently investing over $0.25 billion per year in innovation with a meaningful and increasing portion dedicated to RCAI. This is another sustainable competitive advantage, and we're confident in our ability to keep investing in innovation while continuing to further improve our operating metrics moving forward. Second, we are at the front door and top of the funnel for consumer-to-business communications. We sit where interactions begin, where customer intent is first expressed and where routing and resolution decisions are made. This gives us access to the real-time context and workflow intelligence that are increasingly valuable in the AI era. Third, we have a complete customer engagement platform powered by RCAI.

This allows us to bring together AI agents and human agents on a single platform across voice, messaging and video. This is delivering real value for customers, and we are already seeing solid early adoption, growing monetization, higher ARPU and strong retention across our RCAI utilizing customer base. Important to note is that all of our RCAI and customer engagement products are fully owned by RingCentral with attendant benefits to control over the road map, time to market and owner economics. We believe this to be another important competitive moat. And fourth, we're delivering strong financial performance.

We're improving non-GAAP and GAAP profitability, reducing SBC, generating meaningful free cash flow and free cash flow per share that is among the best-in-class and returning capital to shareholders via buybacks and dividends. Our results speak for themselves, and we could not be more excited about the road ahead. With this, let me turn it over to Kira.

Kira Makagon: Thank you, Vlad, and good afternoon, everyone. Vlad laid out our vision, a complete customer engagement platform built on a hybrid model of AI and humans working together, delivering seamless customer experiences and better business outcomes. Here's an example of this vision becoming reality. Meet Cartelligent, a California-based automotive broker, deployed our entire RCA portfolio, AIR, AVA and ACE. Previously, their high-value leads were being routed to an answering service where many calls were dropped. With AIR, they decreased lead abandonment to 0, connecting 100% of live leads during business hours and achieved an 85% lead to sign-up target. AVA eliminated manual note taking, ACE delivered visibility and coaching to keep improving.

As the result of all 3 ACE working together with human in the loop, they achieved a 9.85 out of 10 customer satisfaction score. Let me unpack these solutions further. AI Receptionist, or AIR, is designed for front office workers who demand it just works, deployable in minutes, no developers required, built for businesses of any size. AIR can now receive customer inquiries over voice and text messages. AIR is also integrated into call queues, handling overflow and missed calls to improve responsiveness without adding operational overhead. The market is responding well. We ended Q1 with more than 11,800 paying AIR customers, up more than 40% quarter-over-quarter. For customers requiring more complex configurable use cases, we recently introduced AIR Pro.

With AIR Pro, customers can create multitude of fit-to-purpose agents, leveraging over 100 prebuilt integrations, including EHR, CRM, scheduling, e-commerce and billing. Users simply describe what they need their AI agents to do. AIR PRO builds and deploys it, executing multistep workflows. We already have our first paying customers with health care emerging as a natural early fit given AIR Pro ability to address rich workflows while maintaining ease of deployment. One example is a federally qualified health center that was already running RingEX, RingCX and ACE. They added AIR Pro to handle real-time shuttle routing for patients. The agent recognizes the caller's location, [ hearing ] time and live shuttle status to guide patients to the right pickup point.

It sounds simple. The underlying workflow is not. That's exactly the point. AIR Pro makes complex orchestration effortless for the customer and for the business, and once the conversation ends, ACE takes over. ACE now has more than 5,200 customers, up 85% year-over-year. Sales, marketing and compliance leaders use it to automate interruption reviews, connect conversation intelligence into their CRM and ticketing systems, and replace mail evaluations with complete visibility across every call. Take ATB, the largest financial institution in Canada. They added RingEX seats and ACE to eliminate the time lost on manual analysis, a strong example of AI and humans working together.

With human agents handling customer interactions, ACE delivers the post-call analysis, surfacing sentiment, gaps and next steps, giving supervisors a clear picture of every conversation, scoring agents and the coaching data to continuously improve human agent performance. As Vlad mentioned, we have an extensive R&D spend with a wave of new innovations opening up new use cases and expanding our TAM. These investments are leading to tangible results. Last week, we introduced branded messaging via Reach Communication Services, also known as RCS, delivering a verified business identity directly into customers' native messaging app. This pairs up with enterprise branded calling, which displays a company's name and logo on outbound calls, driving higher answer rates from the first moment of contact.

We also expanded support for SMS notifications with local numbers to 190 countries, so businesses can engage their customers wherever they are with the same reliability they expect from RingCentral. Building upon our hybrid model of AI and humans working together, SMS is an important customer engagement channel for both. Customer Engagement Bundle or CEB is our latest product introduction, and it is off to a strong start. CEB already has more than 5,000 customers with nearly 40% attach rate of our paid AI products. CEB brings informal contact center capabilities to RingEX, including contact center grade [ focus ] and SMS shared inboxes.

One example of a customer using these capabilities is Worldwide Steel Buildings, a Missouri-based company already using RingEX and ACE. They added CEB to manage queues, eliminate missed inquiries, and now get a complete view into every interaction, all on one platform. Importantly, CEB is now available for Microsoft Teams, embedding voice, call queues, SMS inbox, intelligent routing and analytics inside Teams, effectively turning Teams into an informal contact center. As to formal contact centers, RingEX now has more than 1,700 customers, up over 70% year-over-year with more than half utilizing AI. For example, Excelsior Orthopaedics in Amherst, New York was struggling with a 22% call abandonment rate and hold times averaging 30 minutes.

With RingCX and ACE Quality Management, they cut abandonment to 8% and reduced wait times tenfold, down to just 3 minutes. Together, CEB and RingCX give customers powerful rightsized options across both informal and formal contact centers and a clear path to grow with us as their needs evolve. The combination of our RingEX, RingCX and AI portfolio, robust platform, omnichannel capabilities is fueling ongoing migrations from on-prem to cloud. For example, this quarter, Coca-Cola United, the third largest Coca-Cola bottler in the U.S. with 60 locations is migrating thousands of seats to RingEX. A large Fortune 500 insurance company replaced their on-prem system and is further expanding RingCentral enterprise-wide deployment with tens of thousands of RingEX seats.

The New York Mets are replacing a decade-old on-prem system with RingEX, RingCX and our call queues booster. A major Internet and streaming provider added RingEX to their existing RingCX deployment, along with AI capabilities, including ACE to drive greater operational efficiency. [ Casio ], an iconic consumer electronics company, consolidated their legacy systems onto RingEX and RingCX and added ACE quality management to automatically score calls and improve visibility across every customer interaction. Our innovations continue to be well received by the channel and our GSP partner community, in particular. Multiple GSPs partners are now extending their offerings to include our AI products. Cox Communications recently began deploying our native AI-powered contact center to their customer base.

And this quarter, TELUS and Spectrum Business have also started bringing our AI portfolio to their customers, expanding our reach and reinforcing platform's value at scale. In summary, we're delivering significant value to businesses and the industry analysts are recognizing this. This quarter, we were named a leader in both the inaugural 2026 IDC MarketScape for worldwide communications engagement platforms and the 2026 Omdia Universe for customer engagement platforms. From serving SMBs to enterprise and addressing simple to complex needs, and with our unwavering commitment to innovation and a well-differentiated GTM, we're in a strong position to deliver a modern, complete, AI-first customer engagement platform at scale. And with that, I will turn it over to Vaibhav.

Vaibhav Agarwal: Thank you, Kira, and good afternoon, everyone. We started 2026 with another solid quarter and delivered against all the commitments we laid out entering the year. Q1 reflected continued consistency in our execution and further strengthening of our financial profile. Let me turn to our first quarter results. Starting with growth. Total revenue was approximately $644 million, up 5.3% year-over-year and at the upper end of our guidance. Subscription revenue was approximately $623 million, up 5.6% year-over-year. Customer trends remained healthy, including steady new customer additions and monthly net retention above 99%. These metrics continue to reinforce the resilience of our recurring revenue model and the mission-critical role our platform plays for customers.

As Vlad noted, we are seeing encouraging early momentum in our AI-led new products. Customers using at least one AI product now represent more than 10% of the base, have doubled year-over-year and are growing in double digits sequentially. Within these cohorts, we see stronger ARPU and net retention rates above 100%. Our growth profile remains durable and newer products are increasingly contributing to both expansion and overall revenue quality. Turning now to profitability. We delivered another quarter of strong margin performance. Subscription gross margin remained stable above 80%. Non-GAAP operating margin reached approximately 23%, up 110 basis points year-over-year and at the high end of guidance. We continue to view this margin expansion as structural.

It is being driven by the underlying leverage in a high recurring revenue model at scale, combined with disciplined hiring, expanded offshoring, vendor consolidation, greater internal use of AI and continued focus on our highest return go-to-market and products. SBC as a percentage of revenue declined approximately 400 basis points year-over-year to 9% in Q1. For the full year, we now expect SBC to be approximately 9% of revenue in 2026, down from approximately 11% in 2025. This continued improvement reflects our disciplined approach to equity management and gives us confidence in our path forward toward a steady-state level of 3% to 4% in the medium term.

The combination of stronger non-GAAP margin and lower SBC drove a record GAAP operating margin of 7.8%, improving by more than 600 basis points year-over-year in Q1. For the full year, we now expect GAAP operating margin to improve from 4.8% in 2025 to more than 9% in 2026. That is a meaningful step forward and reinforces our confidence in reaching our target of 20% over the next 3 to 4 years. Turning to cash flow. We generated more than $140 million of free cash flow in the quarter, up 8% year-over-year. This reflects strong operating performance, continued efficiency gains and improvements in working capital. We generated free cash flow per share of $1.62, up 15.4% year-over-year.

Recurring revenue, strong gross margins and improving operating efficiency continue to translate into substantial cash generation. As a result, we are now raising our full year free cash flow outlook to approximately $600 million or a 13% improvement year-over-year. Now let me turn to capital allocation. Our approach remains balanced and disciplined. We are investing in growth, delevering the balance sheet and returning capital to shareholders. During the quarter, we addressed the $609 million convertible maturity by refinancing it with the undrawn Term Loan A. We reduced overall debt by approximately $46 million and lowered net leverage to 1.6x. We continue to make steady progress towards our goal of reducing gross debt to $1 billion by the end of 2026.

Importantly, we now have no maturities until 2030, and we maintained $355 million of undrawn credit capacity. We also continued to return capital to shareholders. During the quarter, we repurchased approximately 2.5 million shares for $81 million. At the end of Q1, we had approximately $418 million remaining under our repurchase authorization. The diluted share count declined 6% year-over-year to approximately 87 million shares, and we paid our first quarterly dividend of $0.075 per share during the quarter. With that, let me turn to guidance.

For fiscal 2026, we are raising subscription revenue to be $2.54 billion to $2.56 billion, representing growth of 4.7% to 5.5%, raising total revenue to be $2.62 billion to $2.64 billion, representing growth of 4.2% to 5%, raising GAAP operating margin to 8.9% to 9.6%, expanding 450 basis points year-over-year, raising non-GAAP operating margin to 23.3% to 23.7%, expanding 100 basis points year-over-year, raising free cash flow to $590 million to $605 million, up 13% year-over-year. SBC in the range of approximately $240 million to $245 million, improving 180 basis points year-over-year as a percent of revenue.

Fully diluted share count of approximately 86.5 million to 87 million shares, 5% lower year-over-year, raising non-GAAP EPS to be between $4.85 to $5.01, up 13% year-over-year. This results in free cash flow per share of $6.78 to $6.99 for the year, up 18% year-over-year. For Q2 2026, we expect subscription revenue of approximately $628 million to $633 million. Total revenue of approximately $648 million to $653 million. GAAP operating margin of 6.6% to 7.6%, up 110 basis points year-over-year. Non-GAAP operating margin of approximately 23% to 23.2%, up 50 basis points year-over-year. Non-GAAP EPS of $1.15 to $1.17, up 10% year-over-year.

SBC in the range of approximately $58 million to $62 million, improving 130 basis points year-over-year as a percent of revenue. Fully diluted share count of approximately 87 million shares, lower by 6% year-over-year. In closing, Vlad has stated 4 key takeaways, namely deep and defensible moat in an expanding market, RingCentral as the front door and the top of the funnel for consumer-to-business interactions, complete customer engagement platform powered by RCAI and strong financial performance. To double-click on the last point, we have an efficient business at scale and a durable compounding free cash flow model.

With approaching $600 million of expected free cash flow in 2026, we have the flexibility to reinvest for growth, strengthen the balance sheet, all while returning capital to shareholders, and I couldn't be more excited about the opportunities ahead. With that, let's open the call for questions.

Operator: [Operator Instructions] Today's first question comes from Tim Horan at Oppenheimer.

Timothy Horan: Great quarter, and congratulations on expanding the margins and creating a lot of new products. Vlad, you kind of -- well, you invented the UCaaS industry and had great vision there. Can you talk about where this new AI hybrid agent communications industry will be 5 or 10 years from now? How pervasive will AI be in voice communications? Can you talk about maybe any new products and services we'll see? And how rapidly are AI models improving at this point? How rapidly are your services improving as you see it even right now?

Vladimir Shmunis: Yes. Great. Tim, you're too kind, but thank you. Look, I'll go right to left. How fast are things improving? Speed of light, I don't know. These models are getting progressively better, progressively more independent. They are absolutely changing the way things are done across everything. And we -- RingCentral, we are actually in a very interesting position to where we are both very heavy users of AI internally, and spending quite a bit of attention and effort on that, but as well as, of course, providing frontline, customer-facing AI tools. And some of these AI tools are designed to basically get the human out of the loop and some of them are specifically designed to enhance human productivity.

So to the first part of your question, what we see moving forward, I don't know, 10 years is a long time, but say, for the foreseeable future, basically more or less a hybrid world. What I mean by hybrid is some interactions are best handled by AI. That will only increase and AI will become more and more powerful. But we still very much see room for a human in the loop. And this comes in where, look, I mean, AI, at least for the foreseeable future, is probably not going to be able to address each and every inquiry. And you know what, I'll give you a simple example, and sometimes people oversee this.

There are things that AI will not be allowed to do legally, okay? For example, AI is probably not going to be in a good position to provide medical advice if it is on behalf of a licensed medical provider. So for the foreseeable future, we don't see AI being licensed as a practicing physician or someone who can do prescriptions and so forth. And where it all comes together is that, let's say, you have a customer inquiry or a patient inquiry coming into a medical provider and AI answers whatever it can and it can do quite a lot.

It can answer billing questions, it can set up appointments, it can maybe even read your test results without commenting. But at some point in time, you well may want to ask for some specific advice and AI then has to connect you to an actual human being. And this is why when we talk about our key AI portfolio, we talk about AI before a human gets involved, AI while a human is involved and then AI after either an AI agent or a human agent is done with the call. So then we have AI processing recordings and transcripts, getting learnings from that.

And then the extreme and amazing power for all of this, it gets all fed right back in. So next call, both AI agents and human agents can be smarter, more productive, more efficient. So that may be a little bit longer answer maybe, but we think that world is going to be neither all AI nor all human, but a bit of both. And where we, RingCentral are just very fortunate to find ourselves is we are one of a very, very small handful of providers that can actually serve both needs of the same platform.

Because if you think about it, you have legacy providers, especially some of the on-prem legacy providers to this day that can bring no AI basically. And then you have lots of start-ups, but they cannot really connect to a human. They have to integrate with third parties. RingCentral, we are able to serve both needs, okay? So single platform, single invoice, single SLA, single bill, all kinds of efficiencies and cost savings across the board. And we are able to, again, field this complete, well-integrated hybrid human agent, AI agent portfolio, so that's what we're banking on.

Operator: Our next question today comes from Catharine Trebnick at Rosenblatt.

Catharine Trebnick: Nice quarter. So I have 2 questions, and I'll be brief with them. One is it looks like you've really stabilized your revenue growth, roughly 5% in the last several quarters and full year guide implies at the same range, same dance. So you cited AI ARR more than doubled year-over-year, now approaching 10% of total ARR. RingCX is gaining traction. You've got Mitel, Avaya pipeline. So can you explain to me where you think the business is going to break decisively above 5%?

Vladimir Shmunis: I'll take a stab. Hi Catharine, a really good question. Look, one is thank you for noticing. Yes, I mean, we -- numbers speak for themselves. I don't need to really cite them. So look, we're a large company. We're still growing. We are growing steadily to restate what you all are extremely well aware of right now is we have made a major pivot towards profitability, including GAAP profitability and free cash flow and free cash flow per share. We're very proud that all of the positive changes that we were able to effect, and we really are pretty close to best-in-class at this point on FCF basis.

And as far as growth is concerned, look, we have meaningful portions of the portfolio going in double -- strong double and in triple digits, and in certain cases, double or triple digits sequentially, okay? And I can tell you that when I was IPO-ing this company back in 2013, if you were to take our AI portfolio or our customer engagement portfolio, we'd be independent publicly traded companies just based on that, probably worth more than RingCentral was worth at the time of our IPO back then, right? So we absolutely have these green shoots. But it is a $2.6 billion business. Industry is going through transformation. We are certainly seeing price rationalization, especially at the high end.

And as we discussed before, we're still lapping some -- we still have some COVID lapping contracts even to this day, so they are being repriced as they come up for renewals. But look, I think future is bright. Future is bright. We are hitting on all cylinders. Eventually, our AI-led products -- and by the way, all of our products are AI-led, given the growth vectors and given size of the market that we're seeing, we are very, very confident that we have a lot of room to grow. There is still -- obviously, there is execution. Nobody -- we're not taking anything for granted here, but there is a market, we have a strong team.

We're spending $250 million plus on R&D alone. We have a differentiated channel, literally tens of thousands of feet on the street between our direct sales force and partners and global service providers that's unique in the industry. We're in a good position. I think we're in a good position to continue delivering shareholder value, which is in our book is a combination of growth and shareholder -- returning value to shareholders in other ways as well.

Operator: And our next question today comes from Siti Panigrahi with Mizuho.

Unknown Analyst: This is Sameer calling in for Siti. I was just wondering, as you make investments in the AI initiatives, how do you balance growth and margin priorities in those? And how does that square off against your overall 20% GAAP operating margin targets? And if you can share like a glide path or kind of like your view into how are you going to achieve those targets, that would be great.

Vaibhav Agarwal: Thank you, Sameer, for the question. So look, from an operating margin standpoint, we are very pleased with the trajectory that we've been on for the last 3 to 4 years. We've doubled our operating margins from, call it, 12.5% to almost 23%, 24% now. And Q1 was another proof point of that. I mean we ended the quarter with record operating margin, and we are raising our guide for the full year, further expanding margins now by 100 basis points. And we are doing this while we are investing in innovation. So let's call it the power of and, which is we are growing, investing in innovation and expanding margins and free cash flows at the same time.

And the margin expansion is structural. We have -- Vlad talked about a large recurring base. We have a $2.5 billion recurring revenue model, ARPUs are strong, net retention rate is strong, gross margins are high, so that gives us leverage. There is embedded operating leverage in the model wherein our revenue growth continues to outpace expense growth. And it's also driven by disciplined cost management. So we are disciplined in terms of hiring and offshoring vendor consolidation, increasingly using AI within the company, so the margin drivers are structural. We are also looking at operating margins in the context of reducing SBC, GAAP profitability and free cash flow and free cash flow per share.

So as you saw, we further reduced SBC this quarter. Our trajectory for this year is going to take down SBC by 200 basis points, and we have outlined the long-term outlook -- sorry, a medium-term outlook of 3% to 4%. So we are well on our way to doing that. As a result, GAAP operating margins are growing faster. In Q1, we are expanding GAAP operating margins by almost 600 basis points. So we ended the quarter at nearly 8%. And this year, we'll be close to 9.5%, doubling year-over-year. So that puts us on a trajectory to get to our GAAP operating margin target of 20% as well.

And then these structural improvements, reduction in SBC is also converting into free cash flow and eventually free cash flow per share which we guided to close to $7. And again, as Vlad noted, it's the best in our peer group. So overall, we feel good about how we've guided. We have structural drivers in terms of our recurring revenue model. We have a large base that is very sticky. We have a diversified customer base and an improving GAAP and non-GAAP operating margin profile. So overall, we feel good about where we are.

Vladimir Shmunis: I just want to add -- that's right. Thank you, Vaibhav. But I just want to add at a very high level. I think maybe the question behind the question is, hey, isn't AI good for growth, but eating margins. And we don't think that, that's the case necessarily. Customers are willing to pay for AI, if it's good AI. And again, we have this natural, very deep moat with our ability to deliver both AI and human to human at scale globally, okay? And there are -- and we have lots and lots of really smart engineers. And one of their tasks is to optimize AI. In human speak, use the right model for the right job.

It's all just a tool set. But with what we're seeing out there in the foundational AI community or ecosystem, and just how fast what used to be a state-of-the-art is no longer the very state-of-the-art, but it's still very, very good. And very soon, a matter of months, it becomes open source anyway. There is just a lot happening. We don't think that AI is going to commoditize or become free or virtually free. But for now, we've been able to keep approximately the same gross margins even for our RCAI products. And we're hoping and also working hard that, that's going to continue.

And then everything else that Vaibhav said, we are confident that we will be able to continue growth, continue more AI, which means more stickiness, better ARPUs as well and importantly, continuing our margin expansion and cash flow generation. Fingers crossed.

Operator: Our next question today comes from Brian Peterson at Raymond James.

Unknown Analyst: This is John on for Brian. I wanted to ask on the free cash flow. Really strong quarter of free cash flow, raised the outlook here. But I think if we look at the trajectory and the potential run rate, it suggests you guys are on path to generate cumulatively like multiple billion dollars of free cash flow over the next several years. So first, am I thinking about the trajectory of free cash flow right as we move forward? And then maybe talk about how you're prioritizing the deployment of capital. And then I have a quick follow-up.

Vaibhav Agarwal: Yes. Thank you, John, for the question. Look, again, we are very pleased with the trajectory we have been on. So we now have a consistent track record of expanding free cash flows over the years. 3 to 4 years back, we were a sub-$100 million free cash flow generating company, and we've guided to $600 million, so that's a 6x improvement. And Q1 was another proof point, strong free cash flow, free cash flow per share, raising the guide for the full year, all while again, investing in innovation. And again, the free cash flow that we are driving is because of the structural drivers that I outlined in the previous question.

And the other important point to note is that the quality of free cash flows is also improving for us. It's -- our operating margins are converting very closely into free cash flow now due to working capital efficiency. And again, while we are not providing targets beyond 2026, the $600 million of free cash flow gives us a lot of optionality in terms of capital allocation. And I've outlined a disciplined approach there, which is investing in or reinvesting dollars back into the business to fuel innovation. And again, Vlad talked about the traction that we are seeing with our AI products, so we are balancing expansion, free cash flow expansion with investing in growth.

We've outlined a target of reaching $1 billion of gross debt by the end of 2026, so that's a second use of cash wherein we are continuing to delever the balance sheet, and we are on our path to doing that. And then at these valuation levels, buybacks remains an attractive opportunity, and we are returning cash in the form of buybacks, which we executed in Q1. We have another approximately $400 million outstanding in terms of our authorization. And we paid our inaugural dividend this quarter, which we expect to continue to do.

So overall, I think takeaway is multiple structural drivers, again, to drive free cash flow, both because of the operating leverage and the discipline that we have in terms of costs. And look, we are becoming a compounding free cash flow story that's built on a very durable operating foundation because of the large base that we have built, our recurring customer base and our growing portfolio of AI products.

Unknown Analyst: Okay. That was really good color there. And then on GSPs, I did want to ask, it's been a really good growth vector for you guys. I think it's been growing above the sort of the company average there. You guys have been expanding the product set. So can you maybe talk about the early receptivity you're seeing from GSPs around your newer solutions? Maybe what's contemplated in the guidance from GSPs? And maybe talk about like medium-term targets of where that can go to with the new solutions.

Vladimir Shmunis: We see good receptivity. I think we even mentioned some of this in the prepared remarks. We're seeing multiple GSPs lining up and now expanding their footprint with us by reselling some or all of our RCAI products. So directionally, we are very, very pleased. It is, of course, very, very early. We are not in a position to change the guide at this point. I would say that they're performing -- it's early. They're performing as expected at this point. And look, our history with GSPs is that they're a wonderful amplifier, but -- and we're the starter engine. We still have to get it working right and tune just right with our direct customers.

Fortunately, we have lots of them as well. And then we take this playbook with the GSPs. And then, of course, they have their massive brands and massive networks that they can use to amplify. So I would think that overall, GSP, RCAI in GSP story is probably not so much for this year, but '27, '28 from that.

Operator: And our next question today comes from Michael Funk at Bank of America.

Michael Funk: Two for you, Vlad. First, wondering how you see the pricing model changing over time with AI? And then also AI related, just wondering if you could talk a little bit about the barriers to competition in AI. What's going to prevent other AI solutions from decoupling your own AI and becoming a competitive threat, whether integration or capability?

Vladimir Shmunis: Well, again, taking the second question first, is nothing prevents them except that they don't have this global network that's processing lots of tens of billions of minutes per year and billions of calls and billions of SMS stacks. And we continue our leadership in the UCaaS space, and we are making major inroads in the CCaaS space, now both [ equipped ] with AI. So this is what gives us a pretty strong footing, I think, competitively.

And again, what my answer to the very first question on this call was that in the world of hybrid, it's very hard to see any start-up do -- be able to replicate what we have when the job is to get AI agents and human agents on the same platform without getting third parties involved. And that's a huge, huge, huge competitive advantage we feel that we can come in with a turnkey Swiss Army Knife solution and say -- tell customer, look, right tool for the right job and you only get a deal with us. And if nothing else, it gives us pricing power and flexibility because we also don't have any third parties to pay to.

And by the way, I do want to double-click, when we talk about RCAI, this is our native AI, okay? So we're not paying -- we're consuming tokens, of course, and we're paying foundational LLMs, but we're not -- when we talk about -- these are not products, third-party products that we sell, okay? Okay. So that's the second part of the question. Sorry, repeat the first one, please?

Vaibhav Agarwal: Pricing model.

Vladimir Shmunis: Yes, pricing model. Yes. Look, people talk about this a lot. I can tell you what we're seeing. We're seeing, again, more of a hybrid combination model. I think people initially got all excited about, well, it's all going to be outcomes-based. I don't -- not really personally aware of too many people who are actually truly pricing outcomes. If anything, people are pricing usage. But I tell you more and more what's coming into focus, into [ Vogue ] are these hybrid approaches to where there is some minimal commitment the company makes, whether it be seat-based or some other measure, whatever. In our case, maybe minutes consumed or questions answered or something like that.

But people need some predictability on both sides of the equation. Customers need some predictability and frankly, providers do as well. And this is what we started out with. So when you look at our, for example, AIR portfolio, it is -- it's very simple. You get -- it's still a monthly subscription plan. You get certain allocation of minutes, so unit of measurement is minutes here. And if you're over that allocation, you upgrade into the next tier or you buy another basket of minutes. What we find with our customers is that a business model that resonates is good for smaller customers because it gives them predictability.

And this also works for larger customers because they really have enough analytics to know exactly what they're using. So frankly, for them, it doesn't matter. You can price per seat, per minute. For enterprise, like everybody knows what they're consuming. We know our costs. They need -- they understand their spend. It's all open book anyway. So again, short answer, still hybrid and right tool for the job, depending on...

Operator: And our final question today comes from Elizabeth Porter at Morgan Stanley.

Unknown Analyst: This is Jamie on for Elizabeth. Great to see the continued momentum that you're seeing with the AIR solution and realizing that it's still super early days for the Pro variant. Just curious how you view the opportunity to maybe upsell some of those existing customers to the Pro tier.

Kira Makagon: It's existing customers of both AIR and also non-AIR are both opportunities to upsell AIR Pro. AIR fundamentally is a preconfigured fit-to-purpose agent, very easy to deploy, reception can deploy, meant to do very simple tasks, answer questions, route calls, book appointments. AIR Pro comes to studio and has ability to do much more complex workflows, complex tasks, and they complement each other. So we're right now in the process with AIR Pro being an early access program, open to select customers and seeing those customers actually with AIR also buy into AIR Pro for different use cases, work in tandem, work together.

So generally, the 2 products will be sold in parallel out there and one can talk to another as well.

Operator: Thank you. That does conclude today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

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