RingCentral (RNG) Q1 2023 Call Transcript o Expiration | colorful fool (2023)

RingCentral(RNG-4,66%)
Earnings Call Q12023
May 9, 2023,17:00. EU

Satisfied:

• prepared remarks
• Questions and answers
• call the participants

Prepared Notes:

Operator

Hello. And welcome to RingCentral's Q1 2023 earnings conference call. Let me now turn the call over to Will Wong, vice president of investor relations.

Will Wong--Vice President, Investor Relations

Thanks. Good afternoon. And welcome to RingCentral's Q1 2023 earnings conference call. Joining me today are Vlad Shmunis, Founder, President and CEO; Mo Katibeh, President and Chief Operating Officer; and Sonalee Parekh, Chief Financial Officer.

Our format today will include comments prepared by Vlad, Mo and Sonalee, followed by Q&A. We also have a slideshow available on our investor website to coincide with today's conference call, which can be found in the financial results section of ir.ringcentral.com. Some of our discussions and responses to your questions will contain forward-looking statements about the company's business operations, financial results and prospects. These statements are subject to risks and uncertainties, some of which are beyond our control, and are not guarantees of future performance.

Actual results could differ materially from our forward-looking statements and we undertake no obligation to update these statements following this call. For a complete discussion of the risks and uncertainties associated with our business, please refer to the information contained in our filings with the Brazilian Securities and Exchange Commission, as well as today's earnings release. Unless otherwise noted, all measures below are non-GAAP with a year-over-year comparison. Reconciliations of all GAAP and non-GAAP results are available in our earnings release and on the slides.

For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available, as detailed in the slides posted on our Investor Relations website. With that, I will redirect the call to the Government.

Vlad Šmunis--Founder, President and Executive Director

Good afternoon and thank you for participating in our first quarter earnings conference call. We had a solid start to the year. The first quarter results show that our strategy to drive healthy and profitable growth is paying off. Total revenue increased 14% to $534 million, above the ceiling of our guidance range, and ARR increased 14% to $2.2 billion.

Operating margin increased nearly 700 basis points year-on-year to 17.2%. This was also above our guidance and is again a quarterly record. Our higher margin was driven by continued cost discipline, increased operational efficiencies and the benefits of actions we took last year. These actions position us to be stronger and more focused when the macro environment improves.

While the macro remains uncertain, we remain focused on what we can control. This includes driving continuous innovation and maintaining our disciplined approach to increasing profitability and free cash flow. Sonalee will provide more colors in our profitability soon. You've heard me talk about trust, innovation and partnership as the cornerstone of our success.

In terms of reliability, we achieved 99.999% availability for the 19th consecutive quarter. In terms of partnerships, Mo will add more color to our progress with the channel, strategic partners and global service providers. Now, I'll highlight some of our key innovation achievements this quarter. We believe these innovations will, over time, enhance our value proposition to customers and create additional opportunities for expansion within our large customer base.

These include; RingCentral for Teams 2.0, our next-generation integrated Microsoft Teams app; RingSense, our new AI platform and its first commercial application, RingSense for Sales; RingCentral for Frontline Workers, which combines new Push to Talk functionality with RingCentral Video and Messaging; and in partnership with Vodafone Business, we launched RingCentral Overlay, which powers our messaging and video collaboration capabilities over legacy voice services. Let me go into more detail now. First, we recently announced RingCentral for Teams 2.0. This solution brings RingCentral's world-class cloud PBX capabilities to Microsoft Teams with a fully native experience, without the need for another application.

This means that end users can now take advantage of RingCentral's renowned 99.999% reliability, global availability, advanced analytics, industry-leading features and third-party integration capabilities, all within the single pane of glass in Teams. Second, RingSense. In the past, I've talked about the four megatrends that are driving our business. These are; transition to hybrid work; continued adoption of mobility by enterprises; growing reliance on a distributed workforce; and the desire for an integrated cloud-based UC and CC solution from a single vendor.

Now a fifth truly revolutionary megatrend has emerged: AI. With RingSense, we now have the ability to inject AI capabilities across the entire RingCentral portfolio. As one of the world's largest UCaaS providers, we are uniquely positioned to give our customers a powerful view of their conversations. With RingSense for Sales, our first offering in this portfolio, we will be able to offer sales teams features such as engagement scoring, keyword analysis and AI-generated recommendations.

We are currently transitioning our own sales team from a third-party conversational intelligence solution to RingSense for sales, as well as testing it with several customers in closed beta. The third is RingCentral for frontline workers. This powerful solution combines new push-to-talk capabilities with RingCentral Video and Messaging. Gartner estimates that there are 2.7 billion frontline workers, more than twice the number of administrative workers.

With our solution, frontline workers across all industries can use any smart mobile device to seamlessly and efficiently connect with their front and backend teams. It is available in beta today as a standalone solution or as an add-on to RingCentral MVP. Mo will provide more details. And fourth, the RingCentral Overlay, which enables RingCentral's messaging and video collaboration capabilities for legacy users.

This innovation, in partnership with Vodafone Business, enables a hybrid workforce and serves as a springboard for these customers to migrate to our end-to-end UCaaS communications solution in the future. All in all, it was a solid quarter in terms of growth, profitability and innovation. We continue to innovate, increasing our differentiation. We are also focused on efficiency, which we expect to generate strong free cash flow going forward.

It sets us up well for the future and that's why I'm so excited about the opportunity that lies ahead. Now, let me turn it over to Mo to talk about the quarter in more detail.

O Katibeh--President and Director of Operations

Thank you, Vlad. We had a solid quarter with healthy growth across the portfolio. An example of a win that contributed to this healthy growth is a Fortune 500 company that purchased 5,000 UCaaS seats and 5,000 CCaaS seats. They chose RingCentral for three main reasons.

First, our ability to seamlessly integrate with Teams, providing 99.999% reliability and deep integrations with ServiceNow, Salesforce, and other key aspects of your employees' workflows. Second, our integrated UC and CC platform. In addition to the simplicity of managing a single vendor, the entire organization can now use a single communication platform. This results in increased customer satisfaction and potential new revenue opportunities.

For example, if no one at the local branch answers after a certain number of rings, the call can now simply be forwarded to the call center. And finally, the company plans to save millions of dollars by standardizing on a single platform, eliminating maintenance costs, IT overhead and telecom fees. Cost reduction is a core value for all of our customers, especially in today's environment. We continue to see good traction in our core business due to our ability to help customers save money.

Forrester, a third-party research firm, recently published a new report on the overall economic impact of using RingCentral MVP and Contact Center together. This report concludes that users are seeing a 211% return on investment, with an average payback of less than six months. Additionally, Forrester has found that using RingCentral UCaaS and CCaaS together has three key benefits. First, call processing time has been reduced by 45% compared to 20% for a standalone contact center.

Second, internal call center and UCaaS IT support tickets are reduced by 30%. And third, the time to close each ticket has been reduced by 60%. We are moving towards training our teams. In the first quarter, the number of seats in our Teams business more than doubled year over year.

With our updated RingCentral for Teams 2.0 solution, which is available in beta today and will be generally available this summer, we can provide an even better user experience, and that's not all. Most Teams users have E1 or E3 licenses, including many major customer-facing verticals like healthcare, retail, and professional services. These customers chose RingCentral over Teams Phone because of our deep integrations, reliability and advanced feature sets, all at a very attractive price point. For example, UKG, a leading provider of HR, payroll and workforce management solutions, currently uses RingCentral with Microsoft Teams.

We seamlessly integrate with existing workflows, improving internal employee experience and customer communication. Now I will update you on our launch. First, strategic partners. Avaya just got out of bankruptcy a few days ago and we expect its contribution to increase in the second half of the year.

In addition, Mitel continues to perform to expectations and closed a $1 million transaction in TCV in the first quarter. We also see good traction with many of our GSP partners. Charter, one of our newest partners, performed well. We also launched Vodafone Business in other European territories.

Finally, our new partnership with AWS, still in its early days, is progressing well and we expect to be on the AWS Marketplace later this year. Now channel partners. They make up around 40% of our ARR base and continue to help us expand our reach. The channel is an important part of our go-to-market and we continue to ensure that incentives are aligned with the value they deliver.

In fact, we recently launched our RingCentral Ignite program, which allows partners to manage all go-to-market and customer lifecycle activities without assistance from RingCentral sales, which in turn delivers cost-effective benefits to all parts. Transition to international. I would like to highlight two international deals that we closed with our partners. The first is with a European sports retailer with over 2,000 stores.

They chose the RingCentral solution to help them streamline communication in their retail stores in France. They bought thousands of MVP licenses and also added our new frontline push-to-talk features. This will allow store members to easily and securely communicate via voice, video or messaging at the touch of a button, all without additional hardware. It is the second regional government authority in Europe to recently choose RingCentral to deliver video and messaging to over 55,000 customers.

This was a huge win and demonstrated the power and value that RingCentral Video and Messaging can provide to a large organization independently. Finally, I'd like to talk about the current demand environment. The macro is still in line with the trends we've seen in recent quarters. Additionally, sales cycles remain higher than last year as customers' purchasing decisions continue to receive significant internal oversight and additional levels of approval.

We're also seeing a smaller increase in sales in our existing base as clients cut back on hires and rationalize their headcount. However, win rates remain steady and lead flow consistently strong, demonstrating continued on-premises to cloud conversion demand. With that, let me call Sonalee to discuss our finances.

Sonalee Parekh--CFO

Thank you Mo. I will present the highlights of the first quarter and then talk about our business perspectives for the second quarter and the year ahead. Subscription revenue of $508 million increased 16% year-over-year and was above our guidance range. In constant currency, subscription revenue grew 17% year-over-year.

ARR grew 14% from last year to $2.2 billion. On a constant currency basis, the ARR grew by 15%. We continue to expect ARR growth to exceed subscription revenue growth in 2023. This is because our business operations are more backward weighted.

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

Operating margin increased 680 basis points year-over-year to 17.2%, another quarterly record. The increase was driven by efficiencies achieved across the business, particularly in sales and marketing, which were down 420 basis points year-on-year. The first quarter showed good progress on our path to achieving best-in-class profitability and free cash flow in line with our benchmark. In terms of free cash flow, we generated $54 million in the first quarter of 2023, which includes approximately $7 million related to one-time restructuring items.

Improvements in our customer acquisition costs, billing activities, vendor management and continued focus on increasing efficiency are driving strong free cash flow conversion and we expect continued improvement throughout the year. Our focus on growing free cash flow generation allows us to implement a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, share buybacks and, most importantly, addressing the maturity of our convertible debt. With respect to our debt, our free cash flow gives us many options in terms of how to handle our convertible maturities. While our two converts have a zero percent coupon and don't expire until 2025 and 2026, another two and three years respectively, they are a priority for us and for me personally.

Based on our 2023 projections and assuming our current capital structure, our net leverage will be less than 3 times net debt and EBITDA for the last twelve months ended December 31, 2023, which we expect to continue to improve. Given the deleveraging profile, we believe we have several attractive options to resolve our outstanding convertible maturities. Now, back to the guidelines. While we beat our Q1 revenue outlook, it's still early in the year.

Given the macro uncertainty, we remain cautious in our guidance. Taking that into account, for the second quarter of 2023 we expect; subscription revenue growth of 10% to 11%; 10% growth in total revenue; non-standard operating margin of 17.5%; and non-GAAP EPS from $0.74 to $0.76. For all of 2023, we now wait; subscription revenue growth of 11%, from 10% to 11%; total revenue growth from 10% to 11%; non-GAAP operating margin of at least 18.5%, which is higher than our previous guidance of at least 18%. Based on the midpoint of our revenue guidance, we expect operating profit to grow at least 65%, from at least 60%.

Non-GAAP EPS of $3.19 to $3.25, up from our previous forecast of $3.04 to $3.10. In short, the first quarter was a solid quarter. We exceeded the guidelines at both the top and bottom. We continue to see healthy growth in our business despite the current macroeconomic environment.

We believe that the market opportunity, our leading and differentiated product, and our focus on balancing growth with increased profitability, position us well for continued success. With that, we open the call for questions.

Questions and answers:

Operator

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

Samad Samana--Jefferies -- Analyst

Hey. Good afternoon. Thanks for answering my questions. It's nice to see consistent results.

Vlad, maybe for you. I was just curious, you talked about a lot of new products and increased innovation. And I'm curious, what do you think of these products, do you see them as ways to expand ARPU or drive more cross-selling, or do you see them as value-added features that will facilitate customer acquisition? Perhaps we should think about whether there is a direct monetization opportunity or is it a way to continue to attract more and more customers to the RingCentral platform?

Vlad Šmunis--Founder, President and Executive Director

What. Hello Samad. Great question. Look, it's a little bit of both and it depends.

For example, when you look at RingSense, our artificial intelligence, or getting into the artificial intelligence space, that's absolutely a growth driver as we see it. It will be monetized separately. I also want to point out that it's not just intended to be an add-on for our existing customers or RingCentral customers in general, but we've also designed it to be a standalone product, working with other UCaaS, CCaaS, and frankly even UC and CC solutions. It's such a general purpose.

When you look at the first push-to-talk workers, it's a separate SKU in itself, and again, it can stand alone or it can be added to users. When you look at our overlay work, it's really super exciting, isn't it? Because this is really the first time we've shown clear traction in areas outside of our main cloud PBX. So the whole point of the overlay is integration with legacy local providers but increasing the experience -- the user experience with our video and messaging, and which we believe will be, A, this is a separate monetizable opportunity in and from in yes. , as well as setting up an easier migration path for those customers when they want to move forward and embrace the whole cloud, okay? Am I missing something, you might think or ok? Well, again, a little bit of both is the short answer. But that said, look, whatever we do, whatever value, oh sorry, by far not the last or least, it's the work of our teams and what we call RingCentral for Teams 2.0, and look, that's a big, big step forward.

We believe that we simply have the best team integration on the market today in the space. It's a completely seamless experience. What we've heard loud and clear from customers is that they -- they've standardized on Teams, they prefer to work within the single pane of glass in Teams. But as we all know, Teams doesn't really have, say, a fully viable UCaaS solution, we do have one and this is very close integration.

So we felt -- look, we had good teamwork before, but we were far from the market, technologically. We believe this will really push us forward and position us way ahead of the competition. Again, this will certainly open new doors for us. So it's definitely a revenue driver going forward, but we also believe it will be -- that it will provide persistence to our existing Teams customers because it's just a much better experience.

Operator

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

Sterling Auty--MoffettNathanson -- Analista

What. Thanks. Hey guys. I was just wondering if you could go a little deeper in terms of your discussion of how you would handle convertible debt, maybe you don't want to go into too much detail.

But anything you can give in regards to time and how proactive you want to be in managing that, and what are some of the options that would be more obvious to manage? Thanks.

Sonalee Parekh--CFO

Thanks, Sterling. hey this is Sonalee and thanks for the question. As I said in my prepared remarks, this is a very specific focus for us as a management team and for me personally.

So a few things I'd like to mention without giving too much away. One is that we expect to generate increasing free cash flow in the coming years. And you saw it in the press today, in addition to increasing operating margin by almost 700 basis points year over year, we also achieved a quarterly record in free cash flow. So free cash flow was $61 million for the quarter and that included about $7 million of restructuring expenses, and obviously we're not done yet when it comes to free cash flow.

Within that, we have several options for dealing with converts. So it's using the money that we generate organically, again, which will -- you'll see it improve over the year. Second, you have to remember that last quarter we announced $400 million of the A term loan. This is a deferred drawdown facility, available to us through November 2023, and we're going to be opportunistic in terms of when and if we decide to draw on that. , depending on market conditions.

But with the financial profile that we run and if you think about how rating agencies, for example, look at companies like us and think about our EBITDA profile, we will have other financing options at our disposal. That way we'll have access to more conventional debt markets, which we can use if we want to. Today, the coupon on convertible debt is zero percent. It's a CFO's dream.

Therefore, we will balance contact with converts with other capital allocation priorities, but we will not allow converts to be active.

Operator

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

Siti Panigrahi--Mizuho Securities -- Analista

Thanks for answering my question. And definitely, I just want to focus on cash flow profitability. Good to see this progress even on the margin expansion side, Sonalee. So I understand that you are benefiting from some of the cost cutting and downsizing that you announced earlier.

But can you talk about some other drivers and progress there and drive margin expansion and more cash flow conversion? How sustainable is that? How should we think about the coming quarters or years?

Sonalee Parekh--CFO

Of course, Siti. And I'll jump straight to the second part of your question. It's very sustainable and, again, there's more. We're not done yet.

You've seen a 700 basis point year-over-year improvement this quarter. But you also know that we've increased our OP margin guidance for the full year. We are now targeting an operating margin of at least 18.5% and we are still a long way from at least 20% in the fourth quarter. So not only is it sustainable, but it will get better from here.

Yes, we took some actions at the end of last year, tough actions that you see through the current quarter numbers. I think the profit potential of our scaled business model is really starting to shine and we remain focused on the productivity of our workforce and on optimizing and reducing customer acquisition costs. This is something that Mo and I have talked about in the past and it's an area that we're still really investing in. Another personal example that I will give, just from the financial side in relation to efficiency measures, is the procurement project that we are carrying out.

We had many, many manual processes from procurement to payment, as you can understand for a company that scaled and grew as fast as we did. And now, within my finance team, we're implementing software that will automate many of these processes, and the acquisition initiative alone will save single digit millions, just an initiative in finance. There is also the operating leverage inherent in the business. We focus on programs with the highest return on investment.

We really prioritize how, when and where we invest our money. We actively manage our workforce. This includes opening centers in Dallas and Charlotte, which are cheaper compared to incremental hiring in Belmont. For example, I don't put my team on the financial side of Belmont.

Any of these new hires would be in lower cost geographic regions. And then Mo will probably talk a little bit about what we're doing on the channel side. But we're taking a closer look at how we pay our partners and how we work with them, and that will drive more efficiency and incremental savings. Because partners are really taking on a bigger role in the overall sales process from soup to nuts.

And finally, vendor management consolidation, where we review all contracts, streamline licenses, bid on our vendor contracts, all to really get best-in-class practices. And the last thing I'm going to share just because you made the case for the sustainability of that profitability, and I also want to emphasize free cash flow. We shared last quarter that we will double free cash flow generation from a normalized level of $140 million in 2022 to at least $280 million by the end of fiscal 2024. I am now confident that we can reach that level of generating free cash flow well before the end of fiscal 2024.

And that level of free cash flow generation gives us a lot of flexibility with regards to capital allocation and, more importantly, we resolve our convertible debt cost-effectively.

Operator

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

Meta Marshall--Morgan Stanley -- Analyst

Excellent. Thanks. I just wanted to see if you could sort out some of the benefits that you saw in the quarter that reduce churn, is this a better renewal price, is this a little bit better that adds? The mid-market appeared to be the biggest source of incremental ARR growth. I'm just trying to see if this churn was a little lower than expected.

Any details on the type of this context would be helpful. Thanks.

Sonalee Parekh--CFO

Thank you Meta. What. So I think I'll start off by just addressing net retention, which again is a huge focus for this management team. This is how we produced net retention, reaching above 100%.

And within that, the output is stable in percentage, so the annual output in percentage. What I will say is that a steady outflow on a higher basis actually means a higher dollar outflow, but the overall outflow is stable and on target. Again, we are actively focused on this. We invest in CSM, which means customer success and analytics in that area, because this is a big year of rebuilding as COVID passes.

What I would say is that we've seen some increase in sales because of the macro that we believe in, and that's been mostly across the company. So you are absolutely right when you say that small and medium-sized businesses are a plus point. So, we haven't seen any material changes in the dynamics of this business. And some customers within the company are starting to rationalize positions given the headcount measures they are taking internally.

But we're very focused on maintaining the logo, and again, we're just actively investing in that area. Mo might want to add something in terms of the power we see in SMB.

O Katibeh--President and Director of Operations

What. Sonalee, I think you hit power at the end of the day in SMB. We see that the market is stabilizing. We're still doing well.

Acquisitions were generally strong. So, as Sonalee pointed out, constant turnover and those are factors that we take advantage of when thinking about our direction going forward.

Operator

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

Ryan Koontz--Needham and Company -- análise

Thanks for asking. I wanted to ask about the team environment. I had the opportunity to see your 2.0 on Enterprise Connect and I was very interested. We've also heard that Teams Phone actually slows down.

I'm sure it's because of pimps in general. But I'd like to know if you see any impact on that in terms of your positive opportunity to sell an off-the-shelf Ring UCaaS solution versus opportunities to sell to Teams as its own app in Teams. I appreciate every color in it. Thanks.

O Katibeh--President and Director of Operations

Thank you Ryan and thank you for coming and watching the demos. Right now, as we said in our prepared comments, we're seeing strong growth with our Teams 1.0 business, over 100% year-over-year growth if you will. When we think about Teams 2.0, it's really an opportunity to leverage what's already a pretty significant base of Teams through a significantly improved experience over what we offer in our 1.0 product and, frankly, as Vlad pointed out, with other competitors in the market they offer. And our proposition is really aimed at E1 and E3 users who don't have a Teams Phone license and make up the vast majority of Teams users out there.

And that directly impacts our BAU sales movement, so to speak, where as part of the discovery process, we talk to our customers about what solutions they're using today. Are they using an on-premises legacy solution? Some of them might tell us they're Teams users, and to the extent that they're Teams users, we're focused on delivering the value and benefits of our integrations, our analytics, all honestly, for a simple price. And then, to the extent that the customer also needs a contact center, CCaaS, we can integrate it and bring it to life. To answer your question simply, there are quite a significant number of Teams users today.

We continue to see this as an important growth opportunity moving forward, and with our 2.0 solution, it only gets better.

Operator

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

Brian Peterson--Raymond James -- analyst

Congrats on a good quarter, guys. So I just wanted to start with the top of the funnel business. I know you mentioned that ARR growth and revenue growth on Enterprise is the delta there. What do you see at the top of the funnel that gives you confidence that the company will thrive in the last half of the year? Thanks guys.

O Katibeh--President and Director of Operations

Thanks for the question, Brian. Appreciate it. When we think about the top of the funnel, our lead flow is still pretty strong. And as I mentioned a few minutes ago, we're seeing broad acquisition force across the board.

The dynamic at play and obviously driven by the macro environment is upsell-down-sell, two sides of the same coin that affect our company's operations. And so as the macro improves, our ability to organically sell our traditional products placed in the venture will improve with it, one, then two, and obviously that's taking a little longer. But when you think about the innovations that Vlad articulated, they become new opportunities to cross-sell, up-sell, as well as gain a wedge strategy, if you will, the ability to sell these new products as standalone products and then pull our UCaaS solutions and CCaaS along with it. So that's the dynamic that's going on.

Thanks for asking.

Operator

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

Matt Nadimak--Deutsche Bank -- Analista

Hey guys. Thanks for answering the question. I'm just wondering if you can talk about the booking cadence over the quarter, specifically, I think, was there a dip in March or any spillovers in April? And then just a quick look at the small business ARR, obviously very resilient. I'd just like to know if you can comment on what's driving this relative resilience, perhaps with regard to medium and large companies. Thanks.

Sonalee Parekh--CFO

Clear. Hey Matt, Sonalee here. I'll take the first part of the question and then I can pass it to Mo just about -- specifically about SMB. So, in terms of the linearity of reserves, as you know, we're not specifically about reserves, but I think in the current environment it's worth giving it a little bit of color.

I won't talk month-by-month specifically, but yes, we saw a lot more bookings loaded in the background. So March was the bulk of bookings for this quarter. And, as you know, we've guided or given some color in the last quarter about ARR growth being greater than total revenue growth for the full year and we still expect that to be the case. And as you know, business bookings are more burdened with background work anyway.

So we are seeing more of this trend in the current environment. So I'll let Mo be the only one who can talk about SMB trends.

O Katibeh--President and Director of Operations

What. Well thanks for the question. As you think about the opportunity to close out cycle time dynamics, we articulate that we continue to see cycle times elongated from the first quarter of last year. Now, when you think about SMB/SOHO and SMB Space, it's obvious that this opportunity closes significantly faster.

And one of the dynamics that we had during the quarter was, frankly, very good performance from our marketing organization that, historically, we've said that we're going to optimize brand spend, we're going to improve the efficiency of our generational movement marketing demand and this is happening. With less, they could run more pipelines. That streak is closing fast in the market and it's one of the reasons you're seeing strength in the numbers that we've been able to release. Thanks for asking.

Operator

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

Peter Levine--Evercore ISI -- Analyst

What. Thanks for answering my question. What. Maybe Mo, one is for you, you called Avaya coming back from bankruptcy and I imagine you would see some kind of channel impact.

Was there -- I mean, I think when they were in bankruptcy, was there an impact in the first half, and if so, can you quantify what that impact was? And then maybe another, for sure, over $30M ARPU. Could you perhaps dissect what the underlying cost of UCaaS would be if you excluded the contact center from that number? Thanks.

O Katibeh--President and Director of Operations

Thanks for the question, Peter. So if we're talking about Avaya, look, they came out of bankruptcy a few days ago in early May. As we said before, we expect their contribution to increase in the second part of this year, obviously related to leaving the restructuring behind. We are pleased that the contractual provisions that we have in place will allow us to meet the minimum commitment volumes that we talked about in the last quarter, as well as allow for new market movements, including wholesale, integrations, additional integrations that we are building related to the legacy contact center of Avaya, etc., etc.

And frankly, to the extent that they're unable to meet those obligations if that happens, we're sure there are mechanisms in place to deal with that as well. With that, Sonalee, I turn to you to talk about ARPU.

Sonalee Parekh--CFO

What. Thanks for the question, Peter. So, as you know, we've reviewed and run the business and published the ARPU on a combined basis and I'm happy to say the trend has been steady. As you know, CCaaS has a higher ARPU, significantly higher ARPU than UCaaS.

But even when you exclude the CCS number from the total ARPU, they are generally stable. There was a little weakness in UCaaS versus CCaaS, but it's very, very light. Overall, very steady and stable within the range. And there was a little bit of that, actually, to be clear, some of the smoothness was FX, but it was very marginal.

O Katibeh--President and Director of Operations

What. Exactly. What.

Sonalee Parekh--CFO

And without material change.

Operator

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

Matt Bullock--Bank of America Merrill Lynch -- Analysis

Hey. Matt here instead of Mike. Thanks for answering the question. It's great to hear that the demand environment is holding up.

Can you name any incremental strengths or weaknesses that you've seen in certain verticals this quarter?

O Katibeh--President and Director of Operations

What. Thanks Matt for the question. As we talked about in previous quarters, the strength we are seeing in the verticals is really related to areas that are very focused on what we call the consumer business, the so-called. verticals and companies that sell or serve end consumers as their customers. So healthcare, financial services, retail, professional services, the general public are areas that value UCaaS and the services we provide, frankly, because voice reliability, service uptime, etc. they generate revenue etc.

Those are still verticals that are doing really, really well for us and offer significant opportunities as we look forward.

Operator

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

Matt Stotler--William Blair and Company -- Analista

Hey guys. Thanks for answering the question. Maybe just a sequel and maybe this one for Mo, but it's based on something Sonalee mentioned earlier. And so we talked about last quarter some efficiency improvement initiatives around partners specifically and the referral incentive structures and those relationships.

Just maybe give an update on the level of acceptance you're seeing with these partner changes, and then any early indications of the impact on relationship productivity?

O Katibeh--President and Director of Operations

Very good. Overall, we haven't seen any year-over-year impact on our partnerships related to the changes we've made. As we found out last year, unfortunately in the last quarter, ALE and Atos are no longer exclusive. We remain partners with them, they still have a large base in the venue and will pay off as seats sell.

That's generally the model we're looking for, the model that we feel is driving the right incentive structure and behavior, and generally from our channel partners, we continue to see that the lead flow is steady and there are no significant quarter changes. for quarter. The only other comment I would like to make, and I return to my prepared remarks, is the launch of what we call the RingCentral Ignite program. We've had a variant for a while now, but we're actually putting some in - we're after the arrow, if you will. And what this program does is serve as another way for us to continue to drive our percentage of sales and marketing revenue in the right direction over time.

And how does he do it? First, it provides an economic incentive for our partners to take on more sales and marketing and not include our own direct sales base. This is a great transition, many of our channel partners have long standing relationships with legacy customers that they can now work with, move them to RingCentral and do so without any additional incentives. This brings economic benefits to all parties and in the early days, but we also see very solid interest from the partner channel community in this proposal.

Operator

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

unknown speaker

Hey. This is [inaudible] for Ryan MacWilliams. Thanks for answering my question. I just wanted to know how your renewals went in Q1, maybe compared to Q4 and if you've seen any changes in those renewals by users as a result of the macro.

O Katibeh--President and Director of Operations

Well, we're not leading on renewals, but what I'm going to take back is the comment that Sonalee made, which is to see that the percentage turnover is stable and he's doing well. As we mentioned, in the commercial space, upsells and downsells are, quite frankly, two sides of the same coin. There is some pressure on the downside of sales in the renewal period as our commercial customers who were affected by the macro order are implementing some degree of rationalization of locations related to their own needs. But again, overall the churn percentage has remained stable quarter-over-quarter, year-over-year.

Operator

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

Catharine Trebnick--Rosenblatt Securities -- Analista

Thanks for accepting --

Operator

We seem to have left our relationship with Catherine. The next question comes from Terry Tillman at Truist. Please go ahead.

Robert Dee--Truist Securities -- Analista

Excellent. Thanks for answering the question. This is Bobby Dee instead of Terry. Only one in the contact center.

For those larger businesses over a million dollars, is the attached contact center still in the 60% plus range, or has there been a significant increase or decrease over the year added to date? Thanks.

O Katibeh--President and Director of Operations

Stable. We continue to see our TCV contracts of over $1 million with over 60% CCaaS contributions, and actually this goes back to what we've seen historically, which is in the legacy UC-CC base, about 60% of all CC- and the seats sold were from the same vendors that sold UC to those customers. It's a very obvious buy move. It generates significant economic benefits for clients, as I've described in my prepared observations, which were recently validated by Forrester, an independent third-party consulting firm.

Operator

Today's final question comes from Michael Turrino of Wells Fargo Securities. Please go ahead.

Michael Turrin--Wells Fargo Securities -- Analysis

Hey. Thank you for infiltrating me. Sonalee, I just want to get back outside. You unlock a huge margin boost very quickly.

You made some useful comments about the sustainability of these improvements. Is there anything you can add on how to ensure the right level of optimization and still leave enough in the tank to support double-digit growth well into the future? I'm curious how do you manage balance through this? Thanks.

Sonalee Parekh--CFO

What. Clear. I mean, you've heard us say that we're focused on driving healthy, profitable growth. Therefore, we are and always will be a growing company.

What I've said in previous calls and tried to reiterate today is that we see a scale advantage in the mockup. In fact, we're seeing the profit potential of the business model start to shine, thanks to the many efficiencies we've found in the workforce, in optimizing our customer acquisition costs. And you might remember last quarter when we talked about the actions that we're taking, we were very specific about not touching the frontline sellers and that's something that's still part of the playbook for RingCentral in terms of becoming significantly more profitable. and significantly more cash generating. We hedge P times Q sell moves within the portfolio.

And some of the things we talked about, Mo talked about reducing customer acquisition within the channel, I talked about supplier consolidation, contract review, licensing rationalization, cost discipline, contracting discipline in some of the G&A areas where we still have some work to do, but we feel we've come a long way. So what I would say is that we feel that we've struck the right balance and I strongly believe that we have to invest to grow. And one of the big benefits of optimizing your cost base is freeing up cash to invest in the future, and that's what this team will focus on.

Operator

[Operator logout]

Duration: 0 minutes

Call participants:

Will Wong--Vice President, Investor Relations

Vlad Šmunis--Founder, President and Executive Director

O Katibeh--President and Director of Operations

Sonalee Parekh--CFO

Samad Samana--Jefferies -- Analyst

Sterling Auty--MoffettNathanson -- Analista

Siti Panigrahi--Mizuho Securities -- Analista

Meta Marshall--Morgan Stanley -- Analyst

Ryan Koontz--Needham and Company -- análise

Brian Peterson--Raymond James -- analyst

Matt Nadimak--Deutsche Bank -- Analista

Peter Levine--Evercore ISI -- Analyst

Matt Bullock--Bank of America Merrill Lynch -- Analysis

Matt Stotler--William Blair and Company -- Analista

unknown speaker

Catharine Trebnick--Rosenblatt Securities -- Analista

Robert Dee--Truist Securities -- Analista

Michael Turrin--Wells Fargo Securities -- Analysis

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