RingCentral Earnings: Good Quarter All Around With Stable Demand and Improved Profitability

No-moat RingCentral RNG opened its fiscal year well with results that surpassed both our expectations and the high-end of guidance on the top and bottom line. Additionally, management raised its full-year outlook as win rates remain stable and lead generation is strong despite challenging economic conditions. The macro environment resulted in fewer upselling opportunities along with longer sales cycles as deals are more heavily scrutinized and require additional levels of approval. Despite good performance and a raised outlook, we have not changed our longer-term thinking and therefore we are maintaining our fair value estimate of $51 per share. Shares remain undervalued as the stock has sold off this year, but we continue prefer wide-moat stocks under our coverage during this period of economic turmoil.

First-quarter revenue grew 14% year over year as reported to $534 million, compared with the high-end of guidance at $530 million. Subscription revenue grew 16% year over year to $508 million. Annual recurring revenue grew 14% to $2.161 billion as sales cycles remain elevated and upselling opportunities are scarcer. Despite the macro headwinds, average revenue per user remains steady above $30 to go along with its consistent win rates. Non-GAAP operating margin in the quarter was 17.2%, compared with 10.5% a year ago and guidance of 16.5%. We remain impressed with the rate and magnitude of the operational improvement displayed by RingCentral despite ongoing uncertainty.

Management discussed its convertible debt due in 2025 and 2026 which helped ease our concerns. Last quarter, management guided for at least $280 million in free cash flow by the end of fiscal 2024. Now, it is confident that generation can be achieved much earlier. We think not only is this is a sign of management’s commitment to operational excellence but it should also provide RingCentral with greater capital allocation flexibility, especially considering its two outstanding convertible debt issuances.