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RingCentral (NYSE:RNG) Reports Upbeat Q3, Stock Jumps 17.2%


Full Report / November 09, 2021
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Office and call centre communications software provider RingCentral (NYSE:RNG) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 36.5% year on year to $414.6 million. Guidance for next quarter's revenue was surprisingly good, being $434 million at the midpoint, 3.18% above what analysts were expecting. RingCentral made a GAAP loss of $146.7 million, down on its loss of $20.9 million, in the same quarter last year.

RingCentral (RNG) Q3 FY2021 Highlights:

  • Revenue: $414.6 million vs analyst estimates of $393.4 million (5.38% beat)
  • EPS (non-GAAP): $0.36 vs analyst estimates of $0.33 (7.67% beat)
  • Revenue guidance for Q4 2021 is $434 million at the midpoint, above analyst estimates of $420.5 million
  • Free cash flow of $24.2 million, up 68.3% from previous quarter
  • Gross Margin (GAAP): 73.3%, in line with same quarter last year

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.

Traditionally, the technology used by enterprises to set up their own private telephone networks to communicate both internally and externally involved a lot of on-premise technology and even getting locked into proprietary phones.

RingCentral offers the same functionality through internet telephony (VoIP) integrated in its cloud based phone app. Its advantages include running on any mobile or desktop device, lower cost than legacy competitors, additional functionality like auto-receptionist and rule-based call routing. The company has integrated video calls and chat into their app, with the aim of making their software the only one a company needs to power all their communications. Building on the same technology, RingCentral also develops software to power contact centres.

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, and that drives the demand for integrated communication platforms like RingCentral.

RingCentral competes with other providers of unified communications as a service platforms such as 8x8 (NYSE:EGHT) or Vonage (NASDAQ:VG), but lately also with Zoom (Nasdaq:ZM) which has started expanding into the space with their Zoom Phone platform.

Sales Growth

As you can see below, RingCentral's revenue growth has been very strong over the last year, growing from quarterly revenue of $303.6 million, to $414.6 million.

RingCentral Total Revenue

And unsurprisingly, this was another great quarter for RingCentral with revenue up 36.5% year on year. On top of that, revenue increased $35.3 million quarter on quarter, a very strong improvement on the $26.9 million increase in Q2 2021, and a sign of re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 22.5% over the next twelve months, although estimates are likely to change post earnings.

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 73.3% in Q3.

RingCentral Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Key Takeaways from RingCentral's Q3 Results

Sporting a market capitalization of $21.1 billion, more than $345.1 million in cash and with positive free cash flow over the last twelve months, we're confident that RingCentral has the resources it needs to pursue a high growth business strategy.

We enjoyed seeing RingCentral’s impressive revenue growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 17.2% on the results and currently trades at $275.09 per share.

Is Now The Time?

When considering RingCentral, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although RingCentral is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates.

RingCentral's price to sales ratio based on the next twelve months is 11.9x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that RingCentral doesn't trade at a completely unreasonable price point.

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