Office and call centre communications software provider RingCentral (NYSE:RNG) reported Q1 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 9.5% year on year to $584.2 million. The company expects next quarter's revenue to be around $586 million, in line with analysts' estimates. It made a non-GAAP profit of $0.87 per share, improving from its profit of $0.76 per share in the same quarter last year.
RingCentral (RNG) Q1 CY2024 Highlights:
- Revenue: $584.2 million vs analyst estimates of $578.2 million (1% beat)
- EPS (non-GAAP): $0.87 vs analyst estimates of $0.80 (8.9% beat)
- Revenue Guidance for Q2 CY2024 is $586 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed its revenue guidance for the full year of $2.39 billion at the midpoint
- Gross Margin (GAAP): 70.8%, up from 69.9% in the same quarter last year
- Free Cash Flow of $76.69 million, down 18.3% from the previous quarter
- Market Capitalization: $2.80 billion
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.
Video Conferencing
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.
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 strong over the last three years, growing from $352.4 million in Q1 2021 to $584.2 million this quarter.
RingCentral's quarterly revenue was only up 9.5% year on year, which might disappoint some shareholders. We can see that revenue increased by $12.94 million in Q1, which was roughly the same as in Q4 CY2023.
Next quarter's guidance suggests that RingCentral is expecting revenue to grow 8.7% year on year to $586 million, slowing down from the 10.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8% over the next 12 months before the earnings results announcement.
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 70.8% in Q1.
That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite improving significantly since the last quarter, RingCentral's gross margin is still lower than that of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. RingCentral's free cash flow came in at $76.69 million in Q1, down 12.1% year on year.
RingCentral has generated $313.4 million in free cash flow over the last 12 months, a decent 13.9% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.
Key Takeaways from RingCentral's Q1 Results
It was good to see RingCentral beat analysts' billings expectations this quarter. We were also glad its gross margin improved and free cash flow was solid. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 11.2% after reporting and currently trades at $33.35 per share.
Is Now The Time?
When considering an investment in RingCentral, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although RingCentral isn't a bad business, it probably wouldn't be one of our picks. Although its revenue growth has been solid over the last three years, Wall Street expects growth to deteriorate from here. On top of that, its existing customers have been reducing their spending, which is a bit concerning.
RingCentral's price-to-sales ratio based on the next 12 months is 1.1x, suggesting the market has lower expectations for the business relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While RingCentral wouldn't be our first pick, if you like the business, it seems to be trading at an interesting price right now.
Wall Street analysts covering the company had a one-year price target of $39.77 right before these results (compared to the current share price of $33.35).
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