RingCentral (RNG)

Office and call centre communications software provider RingCentral (NYSE:RNG) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 4.8% year on year to $612.1 million. The company expects next quarter’s revenue to be around $617 million, close to analysts’ estimates. Its non-GAAP profit of $1 per share was 4.2% above analysts’ consensus estimates.

Company Overview

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.

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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, RingCentral grew its sales at a 12.4% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, RingCentral grew its revenue by 4.8% year on year, and its $612.1 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 4.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products and services will face some demand challenges.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

RingCentral’s ARR came in at $2.53 billion in Q1, and over the last four quarters, its growth was underwhelming as it averaged 8.1% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

RingCentral’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between RingCentral’s products and its peers.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

RingCentral’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 99.1% in Q1. This means RingCentral would’ve grown its revenue by -0.9% even if it didn’t win any new customers over the last 12 months.

RingCentral has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.

For software companies like RingCentral, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

RingCentral’s gross margin is better than the broader software industry and signals it has solid unit economics and competitive products. As you can see below, it averaged a decent 70.5% gross margin over the last year. That means for every $100 in revenue, roughly $70.51 was left to spend on selling, marketing, and R&D.

In Q1, RingCentral produced a 70.5% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

RingCentral was roughly breakeven when averaging the last year of quarterly operating profits, decent for a software business.

Looking at the trend in its profitability, RingCentral’s operating margin rose by 7.4 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, RingCentral’s breakeven margin was up 1.9 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

RingCentral has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 18.8% over the last year, quite impressive for a software business.

RingCentral’s free cash flow clocked in at $130.2 million in Q1, equivalent to a 21.3% margin. This result was good as its margin was 8.1 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict RingCentral’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 18.8% for the last 12 months will increase to 20.6%, it options for capital deployment (investments, share buybacks, etc.).

RingCentral reported $154.4 million of cash and $1.39 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $602.7 million of EBITDA over the last 12 months, we view RingCentral’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $56.86 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see RingCentral beat analysts’ EBITDA expectations this quarter. On the other hand, its revenue guidance for next quarter was in line and its full-year EPS guidance was in line with Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 5% to $25.36 immediately after reporting.

Updated: May 15, 2025 at 10:03 PM EDT

Before investing in or passing on RingCentral, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

RingCentral isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue growth was uninspiring over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its expanding operating margin shows it’s becoming more efficient at building and selling its software, the downside is its software has low switching costs and high turnover. On top of that, its customer acquisition is less efficient than many comparable companies.

RingCentral’s price-to-sales ratio based on the next 12 months is 1x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $33.29 on the company (compared to the current share price of $28.01).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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