Office and call centre communications software provider RingCentral (NYSE:RNG) reported Q1 FY2023 results topping analyst expectations, with revenue up 14.1% year on year to $533.7 million. The company expects that next quarter's revenue would be around $536 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. RingCentral made a GAAP loss of $54.4 million, improving on its loss of $151 million, in the same quarter last year.
RingCentral (RNG) Q1 FY2023 Highlights:
- Revenue: $533.7 million vs analyst estimates of $528 million (1.07% beat)
- EPS (non-GAAP): $0.76 vs analyst estimates of $0.69 (9.79% beat)
- Revenue guidance for Q2 2023 is $536 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $2.2 billion at the midpoint
- Free cash flow of $54 million, up from negative free cash flow of $13.6 million in previous quarter
- Gross Margin (GAAP): 69.9%, up from 66.8% 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 strong over the last two years, growing from quarterly revenue of $352.4 million in Q1 FY2021, to $533.7 million.
This quarter, RingCentral's quarterly revenue was once again up 14.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $8.94 million in Q1, compared to $15.7 million in Q4 2022. 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 10.1% year on year to $536 million, slowing down from the 28.4% 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 9.55% 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 69.9% in Q1.
That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it trending up over the last year this would still be considered low gross margin for a SaaS company and we have no doubt shareholders would like to see the improvements continue.
Cash Is King
If you have followed 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 $54 million in Q1, up 40% year on year.
RingCentral has generated $90.3 million in free cash flow over the last twelve months, a decent 4.39% 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 $2.58 billion RingCentral is among smaller companies, but its more than $274.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
RingCentral topped analysts’ revenue expectations this quarter, even if just narrowly. And the strong free cash flow was another positive. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company is up 9.1% on the results and currently trades at $28.89 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. We cheer for everyone who is making the lives of others easier through technology, but in case of RingCentral we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its ability to generate free cash flow avoids a dependency on capital markets, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
RingCentral's price to sales ratio based on the next twelve months is 1.1x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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