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RingCentral Inc (NYSE:RNG)
Q1 2020 Earnings Call
May 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the RingCentral First Quarter 2020 Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Ryan Goodman, Head of Investor Relations for RingCentral. Thank you. You may begin.

Ryan Goodman -- Head of Investor Relations

Thank you. Good afternoon and welcome to RingCentral's first quarter 2020 earnings conference call. I am Ryan Goodman, RingCentral's Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; Anand Eswaran, President and Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand and Mitesh, followed by Q&A.

Some of our discussions and responses to your questions will contain forward-looking statements, including our second quarter and full year 2020 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. In particular, our business is currently being impacted by the COVID-19 pandemic. The extent of its continued impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call.

Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings release and in the slide deck. I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, our GAAP to non-GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website.

With that, let me turn the call over to Vlad.

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Good afternoon and thank you for joining our first quarter earnings conference call. Before I begin, I'd like to first take a brief moment to address the current macro environment. We are living in an unprecedented time of global uncertainty and disruption. Our priority at RingCentral is the health and safety of our workforce, and we acted quickly in transitioning to a work from home model.

As a leader in unified communications as a service, we believe we have a responsibility to help our communities maintain business continuity. To that end, we began offering RingCentral Office for free to K-12 educators, healthcare providers, non-profits, government entities and news media organizations. We also announced a free offer for our cloud contact center solution to those affected by COVID-19 related challenges. We are providing our cloud communications and collaboration solutions to organizations that are working globally and tirelessly to mitigate the impact of this crisis. This offer has been well-received, and we now have over 4,000 such organizations now using RingCentral. We wish our customers, partners, employees and shareholders good health and safety in days ahead.

Now onto Q1. We delivered a strong first quarter, with continued strength in mid-market, enterprise and channel. We also recently made several key announcements. First, we released RingCentral Video, our own video meeting solution, completing RingCentral's differentiated Message Video Phone, or what we refer to as MVP, platform. Second, we announced general availability of Avaya Cloud Office by RingCentral, delivering on the promise made six months prior. Third, yesterday, we announced a new unified desktop app, an entirely reimagined user experience for enterprise communications that is available both on Windows PCs and Macs. Key differentiators for our new desktop app include close integration and real-time switching between message, video and phone communications, as well as seamless switching of meetings between devices. And today, we are happy to announce that Phil Sorgen has joined us as Chief Revenue Officer, reporting to our President and COO, Anand Eswaran. Most recently, Phil was the Corporate Vice President for the US Enterprise business at Microsoft. We'll expand on these key announcements later.

As to our financial performance, revenue and non-GAAP EPS exceeded our guidance. Key drivers continue to be mid-market, enterprise and channel. We continue to see strong contributions from our vertical market initiative focused on education, financial services and healthcare. These initiatives yielded good results, including an over 15,000-seat win with Cornell University, an over 8,000-seat win with a Fortune 500 insurance provider, and multiple accelerated healthcare wins.

Key metrics for Q1 were solid across the board. Total revenue grew to $268 million. This is a 33% increase year-over-year and is above the high-end of our guidance range. Total annual recurring revenue, or ARR, surpassed $1 billion for the first time. Mid-market and enterprise continues to be a key driver of our performance. We define mid-market and enterprise as $25,000 or more in ARR. This grew 52% year-over-year to a $524 million business. Enterprise, defined as customers with $100,000 or more in ARR, grew 59% year-over-year to $318 million. Channel ARR grew 62% year-over-year to $329 million.

Looking forward, in this challenging macro environment, companies are facing the reality that legacy on-premise voice-only systems can no longer meet modern work from anywhere requirements. We believe unified communication and collaboration cloud solutions are key for productive customer, partner and internal interactions. We believe RingCentral is uniquely positioned to meet this demand.

We have a differentiated, enterprise-proven, global, scalable and secure unified Message Video Phone, or MVP, platform. In particular, RingCentral provides cloud-based enterprise class global PBX capabilities, seamlessly integrated with comprehensive native team messaging and video meeting capabilities. With the recent introduction of native RingCentral Video or RCV capability, RingCentral customers can now truly stay fully engaged and productive from anywhere, on any device and in any mode. Very importantly, we can onboard new customers quickly and efficiently, without ever having to go on site, which is especially critical in the current environment.

It has never been more clear that customers use RingCentral for a lot more than just lighting up their legacy desktop phones. As a matter of fact, we saw our app downloads increase over 180% in April versus February, with strong app usage metrics across all modes of communications. To that end, total messages posted in April are up 70% versus February. Total video minutes in April are up over 200% versus February. And total phone calls in-app in April are up over 150% versus February.

The triple digit growth in in-app voice in the last two months makes it abundantly clear that business voice is as important as ever. We've also been very pleased with the uptake of our new RC Video, or RCV, capability. We are seeing rapid adoption of RCV and now have over 1,000 organizations using RCV as their primary video meeting solution, and this number is growing very rapidly. We're also excited to see our strategic partners embrace RCV in their UCaaS offerings. This includes AT&T with Office@Hand and Avaya with Avaya Cloud Office by RingCentral.

Speaking of Avaya, as I mentioned, we launched Avaya Cloud Office by RingCentral, or ACO, on March 31, delivering on the promise made nearly six months ago. At launch, Avaya had signed a number of leading master agents to sell ACO, including Jenne, ScanSource, AVANT Communications, Synnex and Telarus. And to date [Phonetic], they have onboarded over 1,700 channel partner agents. With only about one month since the launch, it's still early, but market reception is encouraging.

COVID-19 has put an additional spotlight on the limitations of legacy on-premise communication systems. Longer-term, we believe that work from anywhere, and in particular, work from home will continue to be a key requirement for businesses worldwide. Business communication solutions that enable work from anywhere are now more critical than ever. RingCentral has always been at the forefront of enabling people to work from anywhere, use any device and communicate in any mode. With this backdrop, and given our recent progress with the differentiated MVP platform that solves a mission critical need for many businesses, we are confident that in the long term, cloud will continue winning and RingCentral will continue winning in the cloud.

Now, for some additional color on Q1, I will turn the call over to our President and Chief Operating Officer, Anand Eswaran.

Anand Eswaran -- President and Chief Operating Officer

Thank you, Vlad. Good afternoon, everyone. I would like to start by extending my wishes for the good health and safety to you, your families, friends and colleagues. I will begin with an update on how we are managing the business in this COVID-19 environment. Then I will provide some examples of how we are empowering our customers to succeed in these unprecedented times.

But first, I wanted to welcome our new Chief Revenue Officer, Phil Sorgen, who started this week. As Vlad shared, Phil is a 24-year Microsoft veteran and most recently was the Corporate Vice President for the US Enterprise Commercial business. Prior to that, Phil was the Global Channel Chief, harnessing the power of all partners to drive growth for Microsoft. Phil also led US Small and Medium Businesses and served as the President of Microsoft Canada in earlier roles at Microsoft. We are excited to have Phil join us. Phil brings 30 years of experience in leading sales and partner organizations at global scale and is going to have an immediate and lasting impact.

Starting the second week of March, we have efficiently transitioned to working from home across most of our global locations. This transition went smoothly as we have always used our cloud communications platform for customer, partner and internal communications. Our employees have maintained their high productivity and enabled us to close the quarter on a strong note. Thank you to the RingCentral family for the resilience and commitment you demonstrate every day toward our company, our partners and our customers in these difficult times.

In Q1, we were privileged to have helped many of our existing and new customers transition effectively to work from home, while remaining productive in these challenging times. We saw new customers come onboard the RingCentral platform in key verticals like education, healthcare and financial services. We saw existing customers accelerate deployment and leverage more elements of our platform and portfolio. And we saw customers take advantage of our differentiated unified application across messaging, video, phone, we refer to it as MVP, and our global capabilities to help keep their employees safe and productive.

Let me share a few examples. In higher education, we continue our progress with top tier universities. Our most recent win was with the Cornell University, where we will provide our MVP communications solutions to their 15,000-plus users. In launching an initiative to modernize its legacy on-premise communications systems, Cornell required a platform that enabled complex call handling services, emergency notifications and mobility. Leveraging our deep PBX expertise and unified MVP solution, we were able to meet these needs, while also delivering meaningful TCO savings.

In healthcare, an example is PM Pediatrics, a pediatric urgent care provider. In this time of elevated need, they needed to optimize resources across their 40-plus locations to better serve their patients. PM Pediatrics chose RingCentral Office to seamlessly manage demand across all of their locations. We were able to roll this out in a matter of weeks and deliver full compliance for security and privacy requirements.

Another example is an existing customer of our RingCentral Office solution we talked about in February, Aveanna Healthcare, the nation's largest provider of pediatric home care. This customer wanted to urgently transition its 300 contact center agents to work from home. In less than a week, we were able to deploy our contact center solution to enable these agents to work remotely.

An example of a large enterprise win with our unified communications platform is Mutual of Omaha, a Fortune 500 provider of insurance and financial services. Mutual of Omaha selected RingCentral to further enhance its communications platform and support its more than 8,000 associates, sales representatives and contractors nationwide.

We're also excited to have been selected as the new communications platform for the Detroit Lions. The Lions embraced the complete MVP solution at the first virtual NFL draft on April 23. This is a great example of a mission critical use case where the customer required a proven, trusted, high-reliability solution.

Global organizations face even more challenges with disparate legacy on-premise systems, making it difficult for their workforces to communicate effectively. For example, Forcepoint, a cybersecurity provider, recently selected RingCentral's Global Office solution, which will enable their 2,000 users to be on a global unified solution with MVP capabilities across 13 countries.

In closing, it is now more evident than ever that customers need a trusted, reliable, fully featured, unified cloud communications platform that can meet their emerging business needs at a global scale. We are inspired by our customer and partner success stories and are deeply thankful to them for trusting RingCentral with their mission critical communications needs. While these are trying times for everyone, we are extremely optimistic about our future.

Now, for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.

Mitesh Dhruv -- Chief Financial Officer

Thanks Anand, and good afternoon, everyone. I'll begin with a few highlights of Q1 results. I'll then spend some time addressing how COVID-19 is shaping our business and wrap up with how that translates into our 2020 outlook.

Q1 was a solid quarter on multiple fronts, and we exceeded guidance and consensus across the board. We surpassed $1 billion ARR, growing at 33%, and saw strong momentum in mid-market and enterprise ARR with over 50% growth. And we successfully raised a $1 billion convertible note at 0% coupon, strengthening our balance sheet. We used a portion of the cash raised to repurchase about 38% of our prior notes.

Operating and free cash flow includes a non-recurring outflow of approximately $14 million of imputed interest on the repurchased notes. Excluding this, our free cash flow margin would have been approximately 5%. To provide better clarity into cash flow generated by core business activities, we've introduced a non-GAAP free cash flow metric in our press release that excludes this allocation. We exited the quarter with $762 million dollars in cash.

Now, I'd like to take a few minutes to address how COVID-19 is shaping our business. We continue to see strong new logo momentum across the board as companies seek to enable employees to communicate effectively in the current work from home environment. In our large upmarket customers, COVID-19 has served as a catalyst for some of our existing customers to accelerate adoption of RingCentral across their footprint and use our product across all modes, messaging, video and phone. Unsurprisingly, small businesses in some verticals like retail, travel and hospitality are seeing elevated churn. We would expect some variability in this area as long as the economic impact of COVID persists. Small businesses within these verticals account for less than 10% of our overall installed base.

We're also seeing some customers extend their payment. However, on a positive note, nearly all of them are actively using our platform. We are closely working with our customer to help them be successful in these difficult times. We hope that these businesses emerge even stronger and with increased loyalty toward RingCentral.

Moving to our phone revenue piece, which has historically been about 5% of our total revenue. Due to shelter in place, we are seeing some demand push out for desktop phones. We resell desktop phones as a low-margin add-on to our recurring and accretive subscription business, purely for our customers' convenience and is not core to our strategy or long-term recurring revenue growth.

For our core platform, as Vlad mentioned, we are seeing customers increasingly leverage the RingCentral app both on laptops, as well as mobile devices, with very high adoption and usage, which is an indicator of long-term retention and customer life-time value.

Switching to our 2020 outlook, we've factored in the headwinds and tailwinds mentioned above. We've contemplated and stress tested various assumptions about what current macro could mean for our business. We believe that in the ensuing outlook, we have conservatively factored in a potential range of outcomes created by COVID-19.

With that, let's turn to the outlook for 2020.

Subscription revenue: we are raising our subscription revenue forecast to be between $1.024 billion and $1.03 billion for an annual growth rate of 25% to 26%. This reflects Q1 strength, positive new logo trends in early Q2 and a prudent outlook for the remainder of the year, given the volatile macro environment. We have also assumed $5 million to $10 million FX headwinds from deterioration of international currencies versus the US dollar.

Other revenue: we are adjusting our other non-recurring revenue to be between $92 million and $95 million for a growth rate of 8% to 12% versus our previously implied guidance of 25% to 27% growth. This adjustment assumes a further reduction in desktop phone demand.

Incorporating our positive outlook for subscription revenue and lowered assumptions for other non-recurring revenue, we expect our total revenue to be between $1.116 billion and $1.125 billion for an annual growth of 24% to 25%.

We are reiterating our non-GAAP operating margin of 9.6% to 9.7%. We are committed to an annual target of 40 basis points to 50 basis points of expansion and redeploying near-term savings from travel and other discretionary items into growth and innovation.

We expect non-GAAP EPS to be between $0.91 and $0.94, based on a share count of 93.5 million. This includes $0.02 of headwind from -- versus our previous guidance from lower interest income assumptions, given recent yields.

We've followed a very similar framework for our Q2 outlook, with subscription revenue range of between $244.5 million and $246.5 million, up 26% to 27% growth, and other non-recurring revenue of $15.5 million to $19.5 million, down 14% at the midpoint.

In summary, we are fortunate to operate in a market that is currently witnessing noticeable increase in demand. RingCentral's solution solves a mission critical need for businesses, and that should project well for long-term customer acquisition and retention. The long-term outlook for the cloud communications market is stronger than ever. For a market which was already growing rapidly, new work from home requirements should provide an additional impetus. It is now more clear than ever that on-premise systems simply cannot serve the needs of the new work paradigm. We believe that in a post COVID-19 world, many things will change, and that modernization of business communications through the cloud will be among key priorities.

As cloud adoption accelerates, we are focused on making sure that RingCentral continues to win in the cloud. To that end, we are excited about the launch of our new video product to provide further differentiation to our leading UCaaS platform. We are also confident that our strategic partnerships, including those with AT&T, Atos and Avaya, will continue expanding our reach to millions of prospects across the globe, which bodes well for our long-term growth.

We pride ourselves on profitable growth. We are committed to our goal of operating at or above Rule of 40 longer term, which we again achieved in Q1. We have a large loyal customer base, a profitable business model and a strong balance sheet, which allows us to continue to invest aggressively in product innovation and go-to-market efforts. With that backdrop, we are confident in our ability to lead in this $50 billion plus UCaaS market.

Finally, on behalf of RingCentral, I wish you, your teams and loved ones health and safety. With that, let me turn the call to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Terry Tillman with SunTrust Robinson Humphrey. Please proceed with your question.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Yeah. Thank you. Good afternoon. It's good to see the MVP performance. Vlad or Anand, maybe my first question relates to -- it's one thing to help kind of turn on the MVP capabilities, but what we're looking at here with your business is, particularly with the bigger enterprise customers, they've got to rethink the way they're doing business and how the workers work. And so, it does seem like a great opportunity for systems integrators and some of the strategic partners. So I'd love an update on Atos, and just maybe other conversations or opportunities you can have with other global SIs or just other partners beyond the service providers. And then, I had a follow-up.

Anand Eswaran -- President and Chief Operating Officer

Absolutely, Terry. That's a good question. So, let me just answer that. This is Anand. Firstly, hopefully, everybody's family is safe and healthy in these surreal times. And thank you for still making the call and listening to us. So, on Atos, we are just early in our work and relationship with Atos. And right now, we are targeting upmarket customers, as you can imagine, and we're experiencing an enormous interest with big brands and large customers. And we feel really good about our joint go-to-market strategy. We are already seeing a lot of traction. As you can imagine, with all of these enterprise customers, since we just got started, the sales cycles are actually are much, much longer. We are excited about the progress. You would expect to see some of these come to fruition over the next months.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Got it. Thanks for the answer. And Mitesh, just as a follow-up, we'd like to look at that net add for Office ARR, and it was I think $66 million, a strong result. Maybe you can just kind of dive deeper into the drivers of that and how we should think about the seasonality of additional ARR as we move through the year. Thank you.

Mitesh Dhruv -- Chief Financial Officer

Sure, Terry. Yeah. I'll double click on the Q1 strength as you mentioned. So a couple of things, Terry, come to mind. There are two or three things that are -- that stood out for us this time. The first one is, we did see strong new logo momentum across the board. If you take a slice of the large deals over a $1 million, we did have the best Q1 ever, and it's fascinating to see that we had this drumbeat even during the COVID period.

If you look at all the $1 million dollar deals with did, about 60% of those deals actually closed in the second half of March, which should have underpinned the secular shift on this new work paradigm, so that's number one. Number two, deal sizes are getting larger, especially in the upmarket segment. Now again, if you take a slice of this $1 million deals, our TCV deals, we saw a 30% year-over-year growth in the TCV itself.

So, new local momentum, deal strength, and if you now layer on the product dimension, which is contact center, we did see year-over-year 2 times increase in deals for contact center over the $1 million deals. So I think it's -- we were luck at this time to be in this secular shift market, and a lot of shifts fell our way.

In terms of the seasonality, I wouldn't expect any different seasonality. It will be more backend loaded for us, given Avaya kicking in toward Q4. We have taken a smidge conservative approach to our guidance, including FX. But overall, sort of a more of the same.

Operator

Thank you. Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question.

Bhavan Suri -- William Blair -- Analyst

Hey, guys. Thanks for taking my question. So, solid job given the environment. Maybe following up on Terry's commentary here, for Anand. Anand, Terry asked about Atos, but let's talk about Avaya. Obviously, the Avaya relationship is a huge part of sort of future growth. You talk about sort of traction a little bit and Vlad gave some comments. But I'd love to get some more color on sort of the early traction you've seen there and anything you want to highlight, given the Avaya deployment, not so long ago, about a month. But I'd love to [Indecipherable] there's more color you can provide around what's happening with Avaya and the rollout there.

Anand Eswaran -- President and Chief Operating Officer

Absolutely. The first thing is, as we said, we launched the joint product on 3/31. Actually, the one thing I'd call out is, the entire company globally shifted to work from home just two or three weeks before that, and we delivered on time exactly as we expected, so we're pretty proud of that. Now, roughly a month, and this is what probably I'll share. We've onboarded roughly 1,700 plus channel partners and several master agents, and the early partner engagement and the customer interest and the customer feedback is actually phenomenal. So we're pretty excited about that.

April trends, whether its pipes or ops or leads or the conversion velocity, give us a great reason to feel optimistic about where this is going and the long-term prospects. As you've heard from us, we are confident that you'll start to see ACO contributing toward the end of 2020. But April trends make us pretty comfortable of our earlier commitments.

Bhavan Suri -- William Blair -- Analyst

Got it. And a quick follow-up for Mitesh. Mitesh, if I look at the Q2 guide, it looks like it's up 1% quarter-over- quarter. But by my calculations, I think you have a 1% or 100 bps FX headwind. So I think it's the same as Q1, like 2% quarter-over-quarter sequential guide. Just I'd like to clarify that if that's correct. And then two, Anand talked about sort of trends. You've talked about sort of positive early trends in 2Q. How is that reflected in guidance? I'd love to understand sort of how you guys have built that into guidance? Thank you. Did I lose Mitesh?

Mitesh Dhruv -- Chief Financial Officer

Sorry. I was on mute. Sorry. Yeah, Bhavan, let me start with your -- second part of your question first. In terms of trends, which I mentioned, April actually was a very fast start. Our new acquisitions are up 40% in April year-over-year, and that's the fastest start to a Q2 I've seen in my eight years at RingCentral. So, that's part one. We are seeing acceleration for upsells as well in certain cases where upmarket customers want to respond quickly in this crisis and want to make their employees more productive. So we are seeing that trend as well. Third trend is in terms of churn, we do -- we are lucky to have a diversified base of customers with no major concentration. So, we are seeing some pockets of churn, like no surprise, in some of the SMB segments in challenging verticals. So, that's sort of the puts and takes there. But relatively speaking, it's all, in a way, good news versus the current backdrop.

Now, if I project forward what's in the guide, we have assumed that the economy does not materially improve until Q4 and the work from home trend continues. So that's one. For subscription revenue, we've also assumed conservatism within this high-risk SMB churn. So that's part two. And then if I need to tie it back to your first question, which is your guidance, sequential question, yes, that's correct. We do have 1 point of currency headwind that will persists starting Q2. So if you were to normalize Q2 and if you were to compare to our Q1 guide, yes, you would see that it's almost very similar, a bit of conservatism given the macro, but no big change given the strengths. And look, I'll say this finally, you know management team here. If the macro improves dramatically, we would expect upside in second half. That's the way I'd characterize it.

Bhavan Suri -- William Blair -- Analyst

Super helpful. Thank you, guys. Thanks again for taking my questions. A nice job.

Mitesh Dhruv -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from line of Mike Turrin with Wells Fargo. Please proceed with your question.

Michael Turrin -- Wells Fargo Securities -- Analyst

Hey there. Thanks. Good afternoon. Good to hear everyone sounds safe and well. Vlad, we saw the launch of the new RingCentral Video product early last month. We're impressed you've been able to keep the product roadmap moving forward in this environment. Is there anything else you can share around what you've seen there in terms of adoption or usage so far, understanding it's still early?

Anand Eswaran -- President and Chief Operating Officer

Vlad? I don't know if Vlad is muted. But let me just take it as Vlad comes on. So a couple of things. One is, again, goes back to what I said about ACO, which is, we launched RingCentral Video right in the middle of the lockdown on feature, on time, which is something we are really proud of. We are seeing a tremendous amount of increased usage across the board. Our total video minutes in April are up over 200% versus February broadly. But we are seeing a lot of that translate to the RingCentral Video product as well. We've had -- as you know, we've been using RingCentral Video internally for over a year and with customers for over nine months in beta. And we are seeing that translate in terms of traction with AT&T. Goosehead Insurance just announced how they were able to move and transition their entire workforce in a matter of a couple of days over to RingCentral Video and over to actually working from home remotely. And so, that was great validation. We've talked about Worldwide Vision similarly using RingCentral Video to actually continue the work they're doing from a non-profit standpoint, especially in the middle of the COVID crisis. So, early feedback, early usage, early adoption in the last 30 days actually has been really good and something we are very proud of.

Vlad, are you on yet? Anything you want to...

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Yeah, my apologies. I did a new testing, which is, I gave this beautiful, extremely well thought out speech on mute. So, I think you covered the highlights. Look, I think short version is, we're quite pleased not only the timing of being able to get it on time in these say difficult times, but the product holding up. It's enterprise grade products by design in every way. So, we built based on our well-known reliability and our well-known security and -- which we've established over the years with our traditional voice infrastructure. And we're seeing all of this translating nicely and holding up. Knock on wood, I should say, but yeah, but holding up in the video domain as well. Customer feedback is positive. Analyst -- the industry analyst feedback is positive. And I think there was some recent press by third parties, which is rather complimentary of the product.

And look, what can I say? We have thousands of customers as in businesses. Many more of that in users. We at Ring 100% own this product. That's many thousand people right there. And look, it's only the beginning for us. This product is pretty good now. It's going to get substantially -- you'll see rapid progress here, which has quite a bit of effort behind it.

And just in summary, I wanted to say, I think we mentioned it in our prepared remarks, if I remember. But some NFL teams runs a draft in it, talk about security and reliability and trust worthiness. And they chose us over 7,000 [Phonetic], call it, better-known options for those reasons. So again, we have [Indecipherable] which went into RCV, and they will remain with RCV. And it will go up. It will continue to grow.

Michael Turrin -- Wells Fargo Securities -- Analyst

That's great. Maybe one for Mitesh. It's a lot to go through there in a limited amount of time. So, I wanted to ask about one of the additional growth drivers that wasn't in the prepared remarks, the AT&T partnership. Any update you can be provide in terms of how that's progressing, I think, would be helpful as well. Thanks.

Mitesh Dhruv -- Chief Financial Officer

Sure, Michael. Yeah. No, good one. Yeah. There is so much to go through, as you said, in the transcript. So, yeah, AT&T, it saw very good momentum again, actually. So, if you double click on couple of the drivers, we did see increased direct and channel participation, meaning more folks are reselling our AT&T product. That's one. That's resulting into a higher pipe, a meaningfully higher pipe. Churn actually is improving in the base. So, if you tie all these three drivers together, we saw a sequential uptick again of over 20% second quarter in a row after AT&T made RingCentral our lead solution. Look, overall number is still smaller in terms of the bigger picture. But I think this would come -- this may prove out to be a tailwind for future growth.

Michael Turrin -- Wells Fargo Securities -- Analyst

Great. Thanks so much. Nice start to the year here. Good job.

Mitesh Dhruv -- Chief Financial Officer

Thank you, Michael. Thank you.

Operator

Thank you. Our next question comes from line of Kash Rangan with Bank of America Merrill Lynch. Please proceed with your questions.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Hi. Thank you very much. Your CFO does such a good job. He anticipates all our questions. It's so hard to ask a good question. But I'm going to try and outfox him. So Vlad, maybe a question for you, or Mitesh, you can jump in as well, as can Anand. Congratulations, welcome to the RingCentral family. As you look at the long term, beyond 2020, 2021, Vlad, what are the vectors that drive RingCentral's business? And among those vectors, what are the things that could end up being stronger than anticipated or weaker than anticipated? Thank you so much.

Mitesh Dhruv -- Chief Financial Officer

Sure. Maybe I can -- I'll take a start and then Vlad can of course jump in with a bigger picture. So Kash, no, you have outfoxed me here. So, as usual, you're asking big picture question. So, look, I think we are still thinking that this COVID impact could be a glass half full for us and it's more of a tailwind we think than a headwind because this was a much needed catalyst for the transition from on-premise to the cloud. And near term, what could go -- or long term, what could go wrong is, the risks are churned from the SMB segment in some challenge industries. It's less than 10% of our installed base, but that is a definite headwind we need to acknowledge. In terms of tailwinds, the new logos we talked about, right, the new demand we are seeing from these customers, like call it, 40% in April, these are the customers who are quickly adopting, being more agile and weathering the crisis. So long term, we will have a base of energized loyal customers with even higher lifetime value because they're here to stay.

And then, now you layer on all the commentary which Anand mentioned about AT&T -- I mentioned about AT&T, which is performing really well. We have Avaya. Early signs are very promising. It'll start kicking into high gear in Q4. We have Atos coming on. And Vlad mentioned about RCV, so where we would be able to capture incremental video demand over time. So I think there are multiple tailwinds going in our favour. Recurring revenue model, it's very predictable. We are seeing sale and marketing efficiencies improve. So I think we will strive to maintain this rule of 40. That's the way at least I think about the picture financially. And of course, Vlad can chime in with a bigger picture.

Anand Eswaran -- President and Chief Operating Officer

Yeah. And if I'd just add a couple of things here, as I look -- you'll ask me for -- you asked us for the long term, 2021 and so on. There are -- everything Mitesh said is going to help us do what we really think drives future growth for us, which is increased focus on the enterprise. 75% of the TAM is in the enterprise, and that's where we are investing and that's driving a lot of our growth, as Vlad said earlier on in the prepared remarks. We're going to double down on partnerships, something which our company is known for. And we will actually expand the lens of partnerships. International expansion is a key thing, and our focus on key verticals. Our traction in healthcare today, education today has been phenomenal. We're going to double down on those six key verticals which further give us a spring in our steps. So that's how I look about the macro strategic elements which drive further growth.

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Yeah, let me try to add to this. Look, obviously, there are macro risks, obviously unprecedented times. But for now, we've been holding up. Our business has been holding up. And as we already mentioned several times, new logos and acquisitions are accelerating. So, at this point, I see way more tailwinds than headwinds, the most obvious tailwind being that on-prem traditional infrastructure is not going to hold up in work from home, work from anywhere. So once you -- once people realize that, which I think more and more are realizing now and we're seeing the numbers to prove it, then yes, they'll go to the cloud, and we happen to be the undisputed UCaaS cloud leader at this point. So we will probably get our fair share and maybe more.

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you very much. Great perspectives. Enjoyed it. Congratulations on the quarter.

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Thank you.

Operator

Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question.

Samad Samana -- Jefferies -- Analyst

Hi, good evening, and thanks for taking my questions [Technical Issues] revenue headwinds. But as I think about customer behavior with more people working from home, if more customers are using soft phones, does that actually accelerate the ability to adopt RingCentral? Or how does that change the adoption dynamic for RingCentral software using a soft phone versus a hard phone?

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Yeah, that's 100% right. So, yeah, well, let me try that. We're already seeing that is -- so, soft phone is always with you, especially if you use the mobile version. To remind people, one of our key differentiators and for many years has been mobile first. We've talked about mobile workforces ever since you've known us as a public company, and I can tell you for many years before as well. So yeah, we're just seeing a lot more engagement. Certainly, as we mentioned, we are seeing app downloads [Indecipherable] but also we're just seeing a lot more engagement and we see a lot more minutes [Phonetic] being used just because this device is always by you. And interestingly enough, once they are in the app, this is where our MVP, Message Voice Phone, capability, which is well differentiated, that's where it comes in. As you know, we spent quite a bit of time to make sure that you can seamlessly switch between modes as well as between devices. So we just introduced -- I think it was yesterday, we introduced our next-gen desktop client, which makes it even easier to do that. So again, we see increased usage, and we project more increased usage and more engagement from the customer base. And we are also, I would say, cautiously optimistic but definitely optimistic that with more app usage, there will be a [Indecipherable] coming in as well.

Again, people find this product useful. We believe it's mission critical, certainly solving mission critical needs for people. And as more and more people get exposed, we think it will be another tailwind for us.

Samad Samana -- Jefferies -- Analyst

Great. That's helpful. And then maybe just a follow-up, Mitesh, on the outlook for 2020, any color or any kind of double-click you can do on what you're assuming in terms of geographies, North America versus EMEA versus APAC? And thanks again for taking my questions.

Michael Turrin -- Wells Fargo Securities -- Analyst

Sure, Samad. So APAC is very small for us. So, North America is more than 90% for us. International did grow faster this quarter than usual. So we are seeing some tailwinds there. But no material change in the way we are modeling the outlook. Over time, I think with the Atos and Avaya kicking in, there will be some tailwinds internationally. But for now, we have not really modeled in any acceleration.

Operator

Thank you. Our next question comes from the line of Sterling Auty with J.P. Morgan. Please proceed with your question.

Sterling Auty -- J.P. Morgan -- Analyst

Yeah, thanks. Hi, guys. Even though it's early, I wonder if you could give us a sense of the demographics, so the types of customers that are in the pipeline through that Avaya partnership. Are they skewing to either a particular industry or particular size of organization? Thanks.

Anand Eswaran -- President and Chief Operating Officer

This is Anand. So I'll take that. The early pipe is essentially, because of the circumstances we are in, is skewing to some of the verticals which we would expect to actually want to accelerate down this path, which is healthcare and education. But outside of that, no, there's no particular patterns I would call out which are different from what we expected, either in terms of segments of customers or any other patterns on any other verticals. These are the only things which I would say is an acceleration based on the times we are in.

Sterling Auty -- J.P. Morgan -- Analyst

Got it. And then one follow-up. Mitesh, you kind of gave us some sense of what's happening in SMB. But when you look across the entire business, any sense of the representation from hard hit industries like travel, hospitality, etc.?

Mitesh Dhruv -- Chief Financial Officer

Yeah, it's similar. It's about -- it's a little bit over 10% if you then take -- extrapolate across the board. But where we are seeing an impact is on the SMB side of these challenged verticals. Our upmarket segment, even though there may be some exposure, we may be -- we are seeing some acceleration at the margin because these customers want to make their employees more productive, and so they are pulling in some of the seats they would have normally pulled in later on.

Sterling Auty -- J.P. Morgan -- Analyst

Understood. Thank you.

Mitesh Dhruv -- Chief Financial Officer

Thank you. Sterling.

Operator

Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

Brian Peterson -- Raymond James -- Analyst

Hi, gentlemen. Thanks for taking my question. And as a lifelong Detroit Lions fan, I'm glad to hear you're helping them out. But Mitesh, maybe start with one for you. I know a lot of people pay attention to the ARR. I wanted to look at kind of the enterprise contribution there. And if we think about some of your larger enterprise customers, enterprise component of that, how much of that is actually showing up in ARR? And what could that expansion opportunity ultimately look like?

Mitesh Dhruv -- Chief Financial Officer

Interesting one. So ARR, the larger the customer, the lower it usually represents in the in-quarter ARR. So if you look at, let's call it, the top 3 deals this time, the top 1 being Cornell, less than 10% of Cornell's deal value is showing up in our ARR. So more future land and expand. Now, if I were to expand that for the top 3 deals, it's -- about 30% is deployed in ARR. So I think what's happening, as this -- you actually hit up on a key thing, that as we are signing larger deals, we -- there's this exhaust pipe of land and expand where the commitments go for multiple quarters and multiple years. So not everything shows up in the first quarter. Just to wrap it up, this time, 30%-ish in the top 3 deals showed up in ARR and more to come in the future.

Brian Peterson -- Raymond James -- Analyst

And Mitesh, just maybe in a similar vein, if we had to look at the enterprise base more broadly, did you see a lot of migration on that expand path so far this year? And what would you say is the penetration into the seat opportunity across your enterprise base today?

Mitesh Dhruv -- Chief Financial Officer

Yeah. Good one, again, Brian. So I think broad strokes here is that because we are signing up such new logos at a more rapid clip, our penetration is still about 15%, 20% in the enterprise base. That business is over a $0.5 billion business now. So even if you don't do anything much and if you expand this installed base -- within the installed base, 5 times, 6 times, there is much more room ahead for us just to keep on accelerating just based on that.

Brian Peterson -- Raymond James -- Analyst

Great color. Thanks Mitesh.

Mitesh Dhruv -- Chief Financial Officer

Thank you, Brian.

Operator

Thank you. Our next question comes from the line of George Sutton with Craig-Hallum Capital Group. Please proceed with your question.

George Sutton -- Craig-Hallum Capital Group -- Analyst

Thank you. One of the very interesting points I thought you made related to seeing the acceleration of clients who previously only had some of their seats with you beginning to move fully to the cloud. I wondered if you could expand upon that. If we think through your top 25 customers for perspective, what percentage of their seats have actually moved to the cloud already?

Mitesh Dhruv -- Chief Financial Officer

I don't have that exact cut, George, for you, the top 25, what have moved to the cloud. Let me try another way. Roughly, I would say, in the top 20 -- top deals, call it, there will be about 35% to 40% of the seats would be deployed, just broad strokes, just looking at some past anecdotal data. So you would say at least more than half is left to be deployed.

George Sutton -- Craig-Hallum Capital Group -- Analyst

Okay. One other question on extending payments. You mentioned that's one of the dynamics of the COVID that we're living through. To quote you, if you could double click on that and explain the accounting behind it and how that will work for you in the next quarter or two from a revenue impact and a receivables impact?

Mitesh Dhruv -- Chief Financial Officer

Yeah, sure. I will double click, George. And I didn't know you had an accounting minor there. So yeah. So let's start from -- let's address it in two things. Let's start with the working capital, and then we'll also start with the rev rec. So in terms of working capital, it's a natural impact, right? We're deferring payments, and we want to help our customers. So there will be some working capital impact in Q2 in terms of higher receivables for us. And the good news about that is we do feel very good about these customers, even though they are deferring payments because the usage is very high. Like, nearly all these customers are using the product, so which is good news. In terms of rev rec, right now, deferring payments does not equal no revenue. So, as long as they will pay in the future, there will be rev rec. Having said that, we have taken a bit of a conservative approach and baked in some reserves in the revenue, assuming that some portion of these customers will not come back and will not pay. So that's reflected in our Q1 actuals. So, we've sort of derisked that a little bit.

George Sutton -- Craig-Hallum Capital Group -- Analyst

Perfect. Thank you very much.

Mitesh Dhruv -- Chief Financial Officer

Sure.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Karan Juvekar -- Morgan Stanley -- Analyst

Yes. Hi, this is Karan on for Meta. Congrats on the quarter. One question I had is, just a little bit more color on -- of your customer adds, how many took advantage of free offerings versus paid offerings? Any color there would be helpful. Thank you.

Anand Eswaran -- President and Chief Operating Officer

Yeah. And so, our offerings which were free in light of COVID was basically geared toward the first responders, so the educators K-12, community colleges, nonprofits, healthcare. So we basically had in the last month about 4,000 plus organizations which took advantage of those free offers to actually get on to our communications platform. We added more than 50,000 users as part of that. And it's rapidly expanding every single day. So that's what we see right now.

Operator

Thank you. Our next question comes from the line of Heather Bellini with Goldman Sachs. Please proceed with your question.

Dan Church -- Goldman Sachs -- Analyst

Hi, this is Dan Church on for Heather Bellini. Thank you so much for taking my questions. I guess just a quick one for me. We touched on -- you touched on it earlier in terms of the initial [Phonetic] feedback on RCV. But anything you can share with alliance to -- with respect to what the take rate is from new customers and how you're thinking about converting all of RingCentral's customer base or a portion of RingCentral's customer base over to the proprietary offering? And how we should be thinking through any possible margin implications from that?

Anand Eswaran -- President and Chief Operating Officer

Vlad, do you want to go?

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Yeah. No, sure. So the question is what conversion to RCV from the base as well as new customers?

Anand Eswaran -- President and Chief Operating Officer

Yeah.

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Yeah, sure. So for new customers, it is a default setting at this point unless there are some -- there is a specific functionality gap that's been identified. And so, for example, we have not yet announced Jive [Phonetic] of RingCentral Video Rooms. That's under way. But strictly speaking, if somebody wants a room, then we would lead with a room-based product. We have not announced our own webinar product yet. Again, that's under way. But -- so, those would be the major exceptions at this point. But everyone else pretty much is getting RCV. But there is a choice for people to go from RCV to RingCentral Meetings, which is home-based or vice versa. So we do have that flexibility.

For existing customers, we are making the switch available at this point, but we are not actively promoting it at this point. But you can expect that over time, we will see RCV growth within RingCentral family. Lastly, I would say that of RCV -- I mean, that RCV is -- we're putting [Indecipherable] behind that of RCV, while still keeping the optionality for better products [Phonetic].

Operator

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please proceed with your question.

Richard Valera -- Needham & Co. -- Analyst

Thank you. First on ACO, just want to get a sense of how the level of transition or migration tools that were in the initial version of ACO were meeting kind of the needs of the customers that you were seeing out there and how significant of an improvement you're expecting in kind of the second version there and how that might change the addressable market of prospective ACO customers?

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Anand, do you want to take that?

Anand Eswaran -- President and Chief Operating Officer

Yeah. So, the broad migration tools basically get launched in Q3. So that will be something we expect to see. But at this point in time, we've always worked with Avaya's on-premise base even before the partnership, and we have a very good way to actually help transition the on-premise customers onto ACO. So that's what we are working on right now as the formalized migration tools come out shortly.

Operator

Thank you. Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.

Will Power -- Robert W. Baird -- Analyst

Okay. Great. Again, congratulations on the results. But maybe just kind of two quick follow-ups, both related to enterprise. I wonder, first, there've been broader market concerns or questions with respect to enterprise sales cycles and whether we see a lengthening in this COVID climate. I wonder if you can comment on what you're seeing. It feels like you may be seeing just the opposite based on what you're seeing in April and the power of the product, but anything broadly within enterprise sales on that front? And then the second piece is, just coming back to AT&T, I wonder if you're seeing more urgency on the part of AT&T to push the RingCentral product into enterprise, given demand. They must be seeing beyond what I think was primarily more of an SMB focus in start.

Anand Eswaran -- President and Chief Operating Officer

Absolutely. So I'll take that. So you're right. As you said, we're sort of -- as I look across the whole life cycle of what you would expect from a customer standpoint, we are seeing a healthy increase in the leads in the upmarket segment post COVID. We're actually seeing that conversion of those leads to opportunities hold good at the same clip. We're actually seeing a slight drop in the sales cycles. So customers are taking the opportunity to get on to an environment and a cloud communication platform because it's so critical right now. We're actually seeing the sales cycles marginally drop and start to close deals faster. And so, that's been good. And the same thing with AT&T. Mitesh talked about some of the data which he shared with AT&T. We're actually seeing a massive increase in the number of sellers who are coming to the table participating in opportunities. We saw almost 30% increase in seller participation in Q1, and we are seeing a fairly significant increase in the enterprise space as we look at April trends with AT&T as well. So you're absolutely right. Slight push, sales cycle is slightly becoming smaller, and we are seeing increased traction in the enterprise with AT&T.

Operator

Thank you. Our next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Brian Schwartz -- Oppenheimer -- Analyst

Yeah. Hi, thanks for taking my question this afternoon. It's actually a follow-up on an earlier question, just to understand some clarification. In terms of the COVID-19 response, the 4,000 organizations, the 50,000 subscribers that got RingCentral Office for free, I'm just wondering if that offer is in perpetuity or if there's a limited duration in the program and these subscribers can be converted after they fall in love with your product. Thanks.

Anand Eswaran -- President and Chief Operating Officer

We basically announced the offer for three months. We wanted to make sure that we do our bit in this time of need for the community. And so, that's -- so it's a wait and watch for us to see how COVID -- hopefully, we get to a point as we expect that June, we'll start to see some recovery and opening up of the ecosystem. Our announced offer was just three months. And we'll see how it goes and make a call on whether we extend it or not in June.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Ryan Goodman -- Head of Investor Relations

Vlad Shmunis -- Chief Executive Officer, Founder and Chairman of the Board

Anand Eswaran -- President and Chief Operating Officer

Mitesh Dhruv -- Chief Financial Officer

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Bhavan Suri -- William Blair -- Analyst

Michael Turrin -- Wells Fargo Securities -- Analyst

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Samad Samana -- Jefferies -- Analyst

Sterling Auty -- J.P. Morgan -- Analyst

Brian Peterson -- Raymond James -- Analyst

George Sutton -- Craig-Hallum Capital Group -- Analyst

Karan Juvekar -- Morgan Stanley -- Analyst

Dan Church -- Goldman Sachs -- Analyst

Richard Valera -- Needham & Co. -- Analyst

Will Power -- Robert W. Baird -- Analyst

Brian Schwartz -- Oppenheimer -- Analyst

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