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RingCentral's (NYSE:RNG) Q1 Sales Top Estimates But Full Year Guidance Weaker Than Expected


Full Report / June 28, 2022
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Office and call centre communications software provider RingCentral (NYSE:RNG) reported Q1 FY2022 results that beat analyst expectations, with revenue up 32.7% year on year to $467.6 million. On the other hand, guidance for the full year slightly missed analyst expectations with revenues guided to $2 billion at the midpoint, or 1.07% below analyst estimates. RingCentral made a GAAP loss of $150.9 million, down on its loss of $186 thousand, in the same quarter last year.

RingCentral (RNG) Q1 FY2022 Highlights:

  • Revenue: $467.6 million vs analyst estimates of $458.3 million (2.02% beat)
  • EPS (non-GAAP): $0.39 vs analyst estimates of $0.34 (14% beat)
  • Revenue guidance for Q2 2022 is $477.5 million at the midpoint, roughly in line with what analysts were expecting
  • The company provided revenue guidance for the full year, at $2 billion at the midpoint, missing analyst estimates by 1.07%
  • Free cash flow of $38.5 million, up 39% from previous quarter
  • Gross Margin (GAAP): 66.7%, down from 72.4% 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, 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 very strong over the last year, growing from quarterly revenue of $352.3 million, to $467.6 million.

RingCentral Total Revenue

And unsurprisingly, this was another great quarter for RingCentral with revenue up 32.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $19.1 million in Q1, compared to $33.8 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates RingCentral is expecting revenue to grow 25.8% year on year to $477.5 million, slowing down from the 36.4% 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 24.3% over the next twelve months.

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 66.7% in Q1.

RingCentral Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.66 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. RingCentral's free cash flow came in at $38.5 million in Q1, up 66.2% year on year.

RingCentral Free Cash Flow

RingCentral has generated $104.9 million in free cash flow over the last twelve months, a decent 6.13% of revenues. This FCF margin is a result of RingCentral asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from RingCentral's Q1 Results

With a market capitalization of $7.21 billion RingCentral is among smaller companies, but its more than $301.9 million in cash and positive free cash flow over the last twelve months give us confidence that RingCentral has the resources it needs to pursue a high growth business strategy.

It was good to see RingCentral deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that RingCentral's revenue guidance for the full year missed analyst's expectations and gross margin deteriorated. Overall, it seems to us that this was a complicated quarter for RingCentral. The company currently trades at $58 per share.

Is Now The Time?

RingCentral may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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. But while its strong free cash flow generation gives it re-investment options, unfortunately its gross margins aren't as good as other tech businesses we look at.

RingCentral's price to sales ratio based on the next twelve months is 3.1x, suggesting that the market has lower expectations of the business, relative to the high growth 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, the shares are trading at a pretty interesting price point right now.

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