Profitability Ramp Outweighs Revenue Deceleration for RingCentral

No-moat RingCentral RNG reported mixed fourth-quarter results that were toward the low end of guidance for revenue but in line with its profitability outlook. Relative to our expectations, guidance was ahead on margins and light on revenue. We are encouraged that average revenue per user remains steady and above $30 with unchanged pricing and win rates, even if macro conditions continue to drive longer sales cycles and smaller deal sizes. The extended partnership with Avaya should be better for RingCentral as it has minimum seat commitments and no up-front commissions. We are also relieved to see the company improve its capital allocation flexibility. We continue to believe that RingCentral is well positioned to capitalize on the continuing migration of legacy PBX phone systems to the cloud. We lowered our growth expectations but raised our profitability estimates, which actually drove our fair value estimate up to $51 per share from $48. While the shares look attractive following the aftermarket selloff, we continue prefer wide-moat stocks under our coverage during this period of economic turmoil.

Fourth-quarter revenue grew 17% year over year as reported to $525 million, compared with the midpoint of guidance at $526 million. Currency was about a 200-basis-point drag on growth. Subscription revenue grew 19% year over year to $502 million. Annually recurring revenue grew 17%, in line with revenue, to $2.100 billion with elongated sales cycles and smaller deal sizes remaining the theme among our software coverage. Contact center ARR reached an impressive $300 million.

Non-GAAP operating margin in the quarter was 14.0%, compared with 10.5% a year ago and guidance of 14.0%. We see significantly improving operational performance as a positive sign in uncertain times as management is committed to profitable growth. Between cost-cutting actions announced last quarter and lower deferred commission amortization, we see a faster ramp to operating margins.