Office and call centre communications software provider RingCentral (NYSE:RNG) reported strong growth in the Q2 FY2021 earnings announcement, with revenue up 36.4% year on year to $379.2 million. RingCentral made a GAAP loss of $110.9 million, down on its profit of $509 thousand, in the same quarter last year.
RingCentral (RNG) Q2 FY2021 Highlights:
- Revenue: $379.2 million vs analyst estimates of $358.7 million (5.7% beat)
- EPS (non-GAAP): $0.32 vs analyst estimates of $0.28 (14.4% beat)
- Revenue guidance for Q3 2021 is $392 million at the midpoint, above analyst estimates of $383.2 million
- The company lifted revenue guidance for the full year, from $1.5 billion to $1.54 billion at the midpoint, a 2.45% increase
- Free cash flow of $14.4 million, down 37.7% from previous quarter
- Gross Margin (GAAP): 72.3%, in line with previous quarter
Founded in 1999 during the dot-com era, RingCentral 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.
As you can see below, RingCentral's revenue growth has been very strong over the last year, growing from quarterly revenue of $277.9 million, to $379.2 million.
And unsurprisingly, this was another great quarter for RingCentral with revenue up an absolutely stunning 36.4% year on year. On top of that, revenue increased $26.9 million quarter on quarter, a very strong improvement on the $17.8 million increase in Q1 2021, and a sign of acceleration of growth.
Analysts covering the company are expecting the revenues to grow 22.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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, licences, technical support and other necessary running expenses was at 72.3% in Q2.
That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the lower 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 Q2 Results
With market capitalisation of $24.5 billion, more than $325.2 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We liked to see that RingCentral beat analysts’ revenue expectations pretty strongly this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is up 2.63% on the results and currently trades at $277.01 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 we have other favorites, we understand the arguments that RingCentral is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. And on top of that, its strong free cash flow generation gives it re-investment options.
RingCentral's price to sales ratio based on the next twelve months is 14.7, suggesting that the market is expecting more moderate growth, relative to the hottest 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.