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RingCentral Earnings: Solid Result as Management Focuses on Innovation and AI

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No-moat RingCentral RNG reported third-quarter results that exceeded our expectations, with solid performance on both the top and bottom lines, while the outlook was in line with our forecast. New CEO Tarek Robbiati highlighted his priorities, which include building a multiproduct business, focusing more on key segments and verticals, expanding partnerships, growing globally, and improving operations, which are easy for us to support. The firm highlighted traction with new products, notably RingCX and RingSense. RingCentral also provided an update on its improving balance sheet that includes continued refinancing and repurchasing of convertible notes. Given results and guidance, our model changes are minor, thus we maintain our fair value estimate of $51 per share. Shares remain undervalued in our view but we prefer wide-moat stocks in our coverage.

Revenue performance continues to decelerate but was solid overall, especially for the more important subscriptions line, as the firm noted no change to macro conditions. Third-quarter revenue grew 10% year over year to $558 million, compared with the high end of guidance at $556 million. Subscription revenue grew 10% year over year to $531 million while annual recurring revenue grew 11% to $2.22 billion. Contact center attach rates remain strong for UCaaS enterprise deals but upsell and seat expansion opportunities remain depressed. Management did not provide a seat count update, which indicates to us that deceleration continues and the firm likely only added a couple hundred thousand seats, which is half the amount it typically has added over time. Despite continued macro pressure, average revenue per user remains steady above $30.

We remain impressed with continued operational improvements that manifest in the form of improving margins. Non-GAAP operating margin in the quarter was 19.1%, compared with 13.5% a year ago and the high end of guidance of 18.5%. We think there is room for cuts to sales and marketing expenses.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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