RingCentral Earnings: A Solid Quarter, a New CFO, and a Nice Renewal

Key Morningstar Metrics for RingCentral

• Fair Value Estimate: $55.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of RingCentral’s Earnings

RingCentral RNG reported second-quarter results that included revenue growth of 5% year over year to $620 million and a non-GAAP operating margin of 22.6%, compared with the midpoints of guidance at $617 million and 22.3%, respectively.

Why it matters: This was an eventful quarter. Street expectations continued to sink while RingCentral consistently delivered decent results, the company renewed a legacy partnership with Nice, and the recently named CFO stepped down, replaced by Vaibhav Agarwal.

• Subscription revenue grew 6% year over year while services contracted 16%. Small businesses and deals led by global service provider partners, like Vodafone, were strong and grew more than 10%. Artificial intelligence continues to gain traction and is on track for $100 million in annual recurring revenue by the end of the year.
• Agarwal has been with RingCentral since 2016 and has served in various executive and leadership roles, including deputy CFO. His priorities will be improving free cash flow and building on durable growth.

The bottom line: We maintain our $55 fair value estimate for no-moat RingCentral, as results and guidance were approximately in line with our expectations. Although we view the shares as attractive, we continue to prefer moatier names in our coverage, given the uncertainty here.

• We acknowledge the market view that pricing will come under pressure, but we think our modest model assumptions already reflect that.

Coming up: RingCentral maintained full-year revenue and operating margin guidance while driving stock-based compensation down and free cash flow up modestly from the prior outlook. This outlook seems reasonable and achievable, which is prudent, given a new CFO.

• Management’s third-quarter guidance was largely in line with our model, with slight upside in profitability. Third-quarter revenue is expected to be $631 million-$639 million, with a non-GAAP operating margin of 22.6% and non-GAAP earnings per share of $1.06-$1.08.