2023-04-06 15:20:18 ET
Summary
- RingCentral reported its Q4 2022 financial results on February 15, 2023.
- The firm provides an array of communications software and customer experience software to businesses of all sizes.
- RNG has produced revenue growth, high operating losses and is starting to see slowing sales cycles.
- Given the risks and its high stock-based compensation history, I'm on Hold for RNG in the near term.
A Quick Take On RingCentral
RingCentral ( RNG ) reported its Q4 2022 financial results on February 15, 2023, missing revenue but beating EPS consensus estimates.
The firm provides a suite of business collaboration and communications software to companies worldwide.
Given the slowing macroeconomic environment and continued high stock-based compensation, I don’t see a meaningful upside catalyst to RNG, so I’m Neutral on the stock for the near term.
RingCentral Overview
Belmont, California-based RingCentral was founded in 1999 to provide a growing suite of online communications technologies to businesses of all sizes.
The firm is headed by founder, Chairman and CEO Vlad Shmunis, who was the founder of Ring Zero, which was ultimately acquired by Motorola.
The company’s primary offerings include the following:
-
RingCentral MVP - communications suite
-
RingCentral Customer Experience - customer service suite
The firm acquires customers through its direct sales and marketing efforts and through various partner channels.
RingCentral’s market & Competition
According to a 2021 market research report by Mordor Intelligence, the global market for customer engagement solutions was an estimated $15.5 billion in 2020 and is forecast to reach $30.9 billion by 2026.
This represents a forecast CAGR of 12.65% from 2021 to 2026.
The main drivers for this expected growth are a growth in technology solutions to improve the customer journey via any device they use to connect with businesses.
Also, a desire to reduce customer churn rate results in improved business financials and growing valuation.
Major competitive or other industry participants include:
-
IBM
-
Microsoft
-
Nuance
-
Oracle
-
Salesforce
-
Avaya
-
Calabrio
-
Aspect Software
-
Genesys
-
Verint Systems
-
Nice Ltd.
-
OpenText
-
Pegasystems
-
EngageSmart
RingCentral’s Recent Financial Results
-
Total revenue by quarter has risen, as the chart shows below:
-
Gross profit margin by quarter has trended lower in recent quarters:
-
Selling, G&A expenses as a percentage of total revenue by quarter have fallen in recent quarters, a positive signal:
-
Operating income by quarter has remained heavily negative, as the chart shows here:
-
Earnings per share (Diluted) have worsened markedly in recent quarters:
(All data in the above charts is GAAP)
In the past 12 months, RNG’s stock price has fallen 75.7% vs. that of EngageSmart’s drop of 17.3%, as the chart indicates below:
As to its Q4 2022’s financial results, total revenue rose 17.0% year-over-year, but gross profit margin fell 0.3 percentage points.
Selling, G&A expenses as a percentage of total revenue have been falling, indicating increasing efficiency in generating revenue.
However, operating losses have remained very high and earnings per share have been worsening into heavily negative territory.
The company’s net retention rate was ‘again over 100%’, however, management did not provide specifics on whether this metric referred to dollars or number of customers.
For the balance sheet, the firm ended the quarter with cash and equivalents of $270.0 million and long-term debt of $1.6 billion.
Over the trailing twelve months, free cash flow was $158.6 million, of which capital expenditures accounted for $32.7 million. The company paid a whopping $386.0 million in stock-based compensation in the last four quarters, diluting public shareholders in the process.
Valuation And Other Metrics For RingCentral
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.3 |
Enterprise Value / EBITDA | NM |
Price / Sales | 1.5 |
Revenue Growth Rate | 24.7% |
Net Income Margin | -44.2% |
GAAP EBITDA % | -5.1% |
Market Capitalization | $2,920,000,000 |
Enterprise Value | $4,520,000,000 |
Operating Cash Flow | $191,300,000 |
Earnings Per Share (Fully Diluted) | -$9.23 |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
RingCentral’s most recent GAAP Rule of 40 calculation was 19.6% as of Q4 2022’s results, so the firm is in need of substantial improvement per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 24.7% |
GAAP EBITDA % | -5.1% |
Total | 19.6% |
(Source - Seeking Alpha)
Future Prospects For RingCentral
In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the growth in its contact center segment, which is now approximately a $300 million ARR business for the firm.
Leadership plans to devote resources to integrating AI technologies across its suite of products, to improve communications, efficiency and productivity for its customers and users.
The company is also focusing on expanding its partnership efforts to further grow its market reach and efficiency.
It is working with AWS to provide vertical-specific for clients in core industry verticals including healthcare, retail, financial services and education.
Looking ahead, management expects 2023 revenue growth to be around 10.5% at the midpoint of the range and non-GAAP EPS to be $3.07 at the midpoint.
Regarding valuation, the market is valuing RNG at an EV/Sales multiple of around 2.3x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.3x on March 30, 2023, as the chart shows here:
So, by comparison, RNG is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of March 30, 2023.
The primary risk to the company’s outlook is an increasingly likely macroeconomic slowdown, which may accelerate new customer discounting or down-selling, produce slower sales cycles and reduce its revenue growth trajectory.
Management is already seeing slower customer decision-making, which is impacting other software companies, too.
Given the slowing macroeconomic environment and continued high stock-based compensation (despite management’s promise to reduce this dilution), I don’t see a meaningful upside catalyst to RNG, so I’m Neutral on the stock for the near term.
For further details see:
RingCentral Sees Slowing Sales Cycles As Slowdown Looms