Office and call centre communications software provider RingCentral (NYSE:RNG) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 10.8% year on year to $539.3 million. The company also expects next quarter's revenue to be around $554 million, roughly in line with expectations. RingCentral made a GAAP loss of $21.5 million, improving from its loss of $159.5 million in the same quarter last year.
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RingCentral (RNG) Q2 FY2023 Highlights:
- Revenue: $539.3 million vs analyst estimates of $536.3 million (small beat)
- EPS (non-GAAP): $0.83 vs analyst estimates of $0.75 (10.7% beat)
- Revenue Guidance for Q3 2023 is $554 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year of $2.2 billion at the midpoint
- Free Cash Flow of $80.6 million, up 49.3% from the previous quarter
- Gross Margin (GAAP): 69.5%, up from 67.5% in the same quarter last year
“It was another solid quarter, as revenue and operating margin were both above our guidance,” said Vlad Shmunis, RingCentral’s founder, chairman and CEO.
Founded in 1999 during the dot-com era, RingCentral (NYSE:RNG) provides software as a service that unifies phone, text, fax, video calls and chat in one platform.
Work is becoming more distributed, both across geographies and devices. In order for businesses to keep functioning efficiently, they need to be able to communicate as well as they did when the teams were co-located, which drives the demand for integrated communication platforms.
Sales Growth
As you can see below, RingCentral's revenue growth has been strong over the last two years, growing from $379.3 million in Q2 FY2021 to $539.3 million this quarter.
This quarter, RingCentral's quarterly revenue was once again up 10.8% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $5.62 million in Q2 compared to $8.94 million in Q1 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that RingCentral is expecting revenue to grow 8.83% year on year to $554 million, slowing down from the 22.8% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 9.65% over the next 12 months.
The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. RingCentral's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 69.5% in Q2.
That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite trending up over the last year, RingCentral's gross margin is poor for a SaaS business. We have no doubt that shareholders would like to see its improvements continue.
Key Takeaways from RingCentral's Q2 Results
Sporting a market capitalization of $3.71 billion, RingCentral is among smaller companies, but its more than $225.4 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
We struggled to find many positives in these results. The big takeaway was that Vlad Shmunis, Founder and CEO of RingCentral, will be stepping down on August 28, 2023. Tarek Robbiati, a member of the RingCentral Board of Directors since December 2022 and CFO and EVP of Finance and Strategy of Hewlett Packard Enterprise, will succeed him as CEO. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is down 11.2% after reporting, trading at $34.6 per share.
So should you invest in RingCentral right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.