Office and call centre communications software provider RingCentral (NYSE:RNG) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 22.7% year on year to $509 million. However, guidance for the next quarter was less impressive, coming in at $526 million at the midpoint, being 3.55% below analyst estimates. RingCentral made a GAAP loss of $284.6 million, down on its loss of $146.7 million, in the same quarter last year.
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RingCentral (RNG) Q3 FY2022 Highlights:
- Revenue: $509 million vs analyst estimates of $502.7 million (1.25% beat)
- EPS (non-GAAP): $0.55 vs analyst estimates of $0.51 (8.88% beat)
- Revenue guidance for Q4 2022 is $526 million at the midpoint, below analyst estimates of $545.3 million
- Free cash flow of $20.5 million, down 30.2% from previous quarter
- Gross Margin (GAAP): 67%, down from 73.3% same quarter last year
“Despite a difficult macro environment, we delivered a quarter that has exceeded our guidance across every key metric,” 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 very strong over the last two years, growing from quarterly revenue of $303.6 million in Q3 FY2020, to $509 million.
This quarter, RingCentral's quarterly revenue was once again up a very solid 22.7% year on year. On top of that, revenue increased $22.1 million quarter on quarter, a solid improvement on the $19.2 million increase in Q2 2022. Happily, that's a slight re-acceleration of growth.
Guidance for the next quarter indicates RingCentral is expecting revenue to grow 17.2% year on year to $526 million, slowing down from the 34% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.2% over the next twelve months.
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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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 67% in Q3.
That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.
Key Takeaways from RingCentral's Q3 Results
With a market capitalization of $2.87 billion RingCentral is among smaller companies, but its more than $305.3 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
RingCentral topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for RingCentral. The company is up 10.5% on the results and currently trades at $31.33 per share.
RingCentral may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.