Office and call centre communications software provider RingCentral (NYSE:RNG) reported Q2 FY2022 results that beat analyst expectations, with revenue up 28.3% year on year to $486.8 million. However, guidance for the next quarter was less impressive, coming in at $502 million at the midpoint, being 1.08% below analyst estimates. RingCentral made a GAAP loss of $159.5 million, down on its loss of $110.9 million, in the same quarter last year.
RingCentral (RNG) Q2 FY2022 Highlights:
- Revenue: $486.8 million vs analyst estimates of $479.2 million (1.59% beat)
- EPS (non-GAAP): $0.45 vs analyst estimates of $0.41 (9.75% beat)
- Revenue guidance for Q3 2022 is $502 million at the midpoint, below analyst estimates of $507.5 million
- The company reconfirmed revenue guidance for the full year, at $2 billion at the midpoint
- Free cash flow of $29.4 million, down 23.7% from previous quarter
- Gross Margin (GAAP): 67.5%, down from 72.3% 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.
As you can see below, RingCentral's revenue growth has been very strong over the last year, growing from quarterly revenue of $379.2 million, to $486.8 million.
This quarter, RingCentral's quarterly revenue was once again up a very solid 28.3% year on year. Quarter on quarter the revenue increased by $19.2 million in Q2, which was in line with Q1 2022. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.
Guidance for the next quarter indicates RingCentral is expecting revenue to grow 21% year on year to $502 million, slowing down from the 36.5% 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 23.2% over the next twelve months.
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 67.5% in Q2.
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. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
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 $29.4 million in Q2, up 103% year on year.
RingCentral has generated $119.9 million in free cash flow over the last twelve months, a decent 6.59% 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 Q2 Results
With a market capitalization of $4.62 billion RingCentral is among smaller companies, but its more than $306.4 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 happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from RingCentral. The company currently trades at $43.4 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. 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 2.1x, 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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