Sterling Auty: Yes, thanks. Hi guys. I wanted to ask two questions on the extension with Avaya. The first one is opening up the ability for them to sell direct or kind of in a wholesale method. How does that impact the amount of revenue per seat that you get, which I would imagine gets diminished. But on the flip side, can you talk about the benefit that I imagine you get at the operating margin contribution level?
Mo Katibeh: Thanks for the question. Yes, we’re very excited about the new agreement with Avaya. We expect them as part of their recapitalization to emerge stronger and be focused on selling Avaya Cloud Office as one of their key offerings into the market. As you say, one of the key reasons why we’re excited is because one, we now have minimum seat commitments as part of the arrangement. And two as we think about the product work we’re doing and the new go-to-market motions that we’re introducing, including their ability to sell direct. There’s a lot more incentive for them to actively go look at their existing, the world’s largest base of on-premise seats and move them to the cloud. Relative to the economics, we expect that the economics of them selling direct is actually accretive to the current economics that we’re getting from them, and then it simply becomes a function of what volumes we should be expecting, minimum commits or potentially something larger in the coming quarters and years.
So hopefully, that answers your question.
Sterling Auty: It does. Just one follow-up would be, is that accretion at the revenue line, the EBIT line or both? And on the guaranteed minimums, it’s a company that’s coming through a package bankruptcy, what’s kind of the, I guess, the handcuffs or the feet to the fire that get those minimums paid?
Mo Katibeh: Great question. So what I tell you is, yes, for sure on the EBIT/contribution margin side, it’s very much accretive. As you think about revenue, it really becomes a function of the volumes that are sold. In a direct motion, yes, there is less top-line, but to the degree that they have the world’s largest base and are able to actively monetize that base. Then it could certainly be accretive on the top line as well. And then to the final piece of your question, we’re comfortable that the contractual provisions that we have in place will allow us to achieve the minimum commitment volumes. And to the degree, that we’re not able to achieve those, then there’s mechanisms in place to address that as well.
Operator: The next question is from Kash Rangan with Goldman Sachs. Please go ahead.
Kash Rangan: Hi, very nice to see all the operational improvements. It looks like you’re getting super laser-focused on all kinds of levers, top-line expenses, et cetera. Good to see that. Vlad, one for you on AWS or maybe Mo two of you or whoever wants to talk about it. What are the specific segments of the market that you think you can address with this AWS partnership that you could previously not addressed? And how does this work will AWS salespeople get compensated? Will there be commission sharing between the two organizations? And how are you going to be uncovering the lead pipeline with respect to generating this business? And as a follow-up, as a result of that, how much of the AWS partnership is in your guidance? Because if I do some rough math, I look at the net new subscription implied by your guidance.
It’s a decline of about 40%, 50%, which guess is consistent with how the fourth quarter panned out. But are you really seeing new business activity in the months of January and February following the trend, or things are looking a little bit better, but you don’t want to get ahead of yourself? Thank you so much.
Vlad Shmunis: Hi, Kash, Vlad here. Yes. No, thanks for the compliment here. Let me take the first part of the first question, please. Look, so it’s obviously early with AWS. We just announced. But it seems for now that it will be skewing more upmarket, more enterprise. This is where their sales forces are most active anyway. I can tell you that we’re already seeing good deal flow. Obviously, this deal has been in the works for quite some time, and the companies have already begun working together. We noted, I think, in our prepared remarks that our entire portfolio will also be available in the marketplace. So we expect for this to be more inclusive. But as far as the direct sales efforts, again, I would see more upmarket concentration. And Mo, maybe you can take the second part of the question.
Mo Katibeh: Yes. Absolutely. So Kash, just to build on that. Yes, we’re very excited about the AWS opportunity. Considering how new it is, that is not currently in our guidance, A. B, what’s really something that has gotten us interested in this one is that to their sellers will be compensated and be able to retire quota by selling our Unified Communications as a Service product. And then there is no commissions back to them, if you will, which was a part of your question. Then I think the final thing that you asked was what are we seeing in terms of so far in 1Q, and the trends that we’re seeing in 1Q are consistent with what we saw in 4Q overall. So Kash, I believe we answered your multifaceted question. But if there’s anything we missed, please let us know.
Operator: The next question is from Meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall: Great. Thanks. Understanding you’re kind of putting some conservatism in your outlook, but just if you could give a sense of how much of that conservatism was due to the environment that you’re seeing versus maybe the cuts that you’ve made and just needing to see kind of how efficiency changes given some of those cuts. And then just maybe as a second question, you just mentioned that the AWS kind of target customer was more market. I guess just given that they already have their own kind of contact center product, just what was the discussion between kind of your own contact center product versus their product? That would be helpful. Thanks.
Sonalee Parekh: Hi, Meta, so just in answer to your first question, yes, we certainly are taking the current macro into account and what we see in the market today in our guide, which has a degree of prudence in it. We are not factoring in any improvement in the macro. And in terms of your question around the cuts we made and whether that is one of the factors in the guide, what I would say there is the actions we took, and I think we covered this partly in last quarter as well, but I think it’s worth reiterating, they were really around being more productive and improving the productivity of our sales motion, and we didn’t make any cuts to sort of front-line sales, and I think that’s a really important point. And then some of the other levers that you’ll see come through the P&L and with our subsequent quarters and margin improvement, it will be things around program spend and procurement savings, vendor rationalization, those kinds of things, which, to me, wouldn’t be correlated with growth in any way.
So our guidance is very much factoring in what we see in terms of macro today. And the other thing I would add is that we are going to be disciplined when we evaluate deals, and that’s something that is sort of guiding principle for us. So that’s why we are able to defend our ARPUs and keep them above $30 and why our subscription gross margins are still healthily above 82%. So that would be the only other factor I would call out.
Mo Katibeh: Very good. Meta, and then to answer the AWS section of your question. First, the addition of RingCentral’s MVP and contact center solutions are simply going to give AWS customers more choice. AWS, of course, will continue to offer their own solutions as well. But by adding us to their marketplace and to their sellers, they’re giving the customers that they have the advantage of a tightly integrated market-leading solution that addresses the needs of many organizations that are looking at buying UC and CC together, which is one of the key trends that we’ve been calling out for quite a few quarters. And then to the second half of your AWS question, think of it as being sold in two ways, one via the AWS marketplace and then the second one via AWS sales reps.
And while products from other UC vendors are available today on the AWS marketplace, RingCentral MVP is the sole UC solution that AWS reps will be proactively selling and receiving commissions for. This arrangement does not exist for any other UC service from another provider.
Operator: The next question is from Brian Peterson with Raymond James. Please go ahead.
Brian Peterson: Hi, thanks for taking the questions. So maybe a high-level question on the go-to-market. I believe in the past, you guys have had this partnership ethos, and it’s really been emphasized. And in that channel was really a way for you guys to help provide scale. We’ve seen significant improvements in the CAC. So I’d love to understand kind of with this new profitability profile and kind of go-to-market motion, does the direct versus indirect or channel relationships change? And how do we think about like using that as a margin lever going forward?
Mo Katibeh: It’s a great question. So let me respond to that with a couple of key points. The first one is we’re still committed to our strategy of partnering with the world’s most recognizable brands across service providers, hyperscalers, legacy PBX providers, et cetera. We know that, that motion gives us unmatched reach into many addressable markets. The Avaya agreement is now enhanced, expanded, extended. Mitel continues to be a strong partner. We’re very happy with what we’re seeing with our service provider relationships. And then relative to Atos and ALE, what I will tell you is, as Sonalee and I have said, we’ve been looking at every aspect of our business. And as part of that, we have made various changes to the terms of the arrangements that we have with Atos and Alcatel-Lucent Enterprise.
I’m not able to get into the details of those arrangements or the new terms, other than to advise that ALE and Atos now have nonexclusive go-to-market motions. We believe that these modifications were on solid economic terms with the intention of helping drive migrations to our leading cloud communications products. And then to the last part of your question, what I will say is that over the last few months, we have brought down the upfront commission costs across the broader channel and VAR ecosystem as well as call it the commission costs to our direct sales base, building on some of the comments that Sonalee made earlier today, while at the same time also allowing top performers across both the channel and our direct sales, the ability to make more.
And that has not driven any sort of material change to deal activity. And our overarching goal is using all of these levers to drive evermore profitable growth.
Operator: The next question is from Strecker Backe with Wolfe. Please go ahead.
