Ring the Alarm, RingCentral Poised for Success as UCaaS Becomes the Business Communication Standard

Business Strategy & Outlook:

RingCentral is a leading unified communication as a service, or UCaaS, provider that enables omnichannel business communication and collaboration on a single cloud-native platform, creating a holistic user experience. As an increasingly mobile workforce requires greater flexibility in business communications, the company believes the firm’s offerings become more critical, and narrow-moat RingCentral should exhibit healthy long-term growth. The company believes the market opportunity for UCaaS providers is significant as 450 million-plus on-premises private branch exchange, or PBX, seats migrate to the cloud. At this point, although cloud penetration of hosted PBX seats is accelerating, less than 5% of seats have moved to the cloud. In a go-to-market model that focuses on leveraging channel partners such as Avaya and Mitel, RingCentral has gained first access to an on-premises PBX install base of over 210 million of these seats. These partnerships provide RingCentral a powerful advantage over competitors in winning a significant portion of the legacy install base. Company foresees healthy long-term growth as the firm increases seat penetration, expands enterprise adoption, and develops its international presence.

RingCentral’s core product, RingCentral Office, deploys a global unified communications platform that integrates messaging, video, phone, and other cloud-based communication solutions. Users are assigned a single business phone number and profile that allows for connection to the business network from any device and location. Company viewed the platform’s 5,000-plus integration offerings as being particularly important in defining the value and competitiveness of the Office product. RingCentral’s moat is supported by strong user metrics, with a subscription model and net dollar retention rates in excess of 100%. They expect enterprise penetration, which has been the fastest growing business segment, to expand further in coming years, and benefit both deal size and retention. This should lead to lower churn and higher seat penetration, further cementing RingCentral’s position as a leader in the UCaaS space.

Financial Strengths:

RingCentral’s financial position is reasonably sound but skews toward risky. As of December 2021, RingCentral has $267 million in cash and cash equivalents versus $1.4 billion in debt. In March 2020 and September 2020, RingCentral issued $1.0 billion of convertible senior notes, due 2025 and convertible at $360 per share, and $650 million of convertible senior notes, due 2026 and convertible at $424 per share, respectively. RingCentral has yet to achieve GAAP profitability, as it remains focused on reinvesting excess returns back into the company. RingCentral does not pay a dividend and has only repurchased stock sporadically. In December 2021, the company announced a $100 million share repurchase authorization, which is expected to occur opportunistically. The firm has historically demonstrated descent cash flows, with free cash flow margins averaging 5% over the last five years, including a downward skew from 2020 where free cash flow was pressured as a result of the COVID-19 pandemic. 2021 has shown a rebound to strong free cash flows, and the company expects healthy free cash flow expansion in the coming years. RingCentral has delivered positive non-GAAP operating margins in each year since 2016, which is expected to continue over the next five years, as well. The firm’s non-GAAP operating margin has averaged 10% over the last three years. Over the next 10 years, margins expand significantly as the company scales, which should translate to GAAP profitability as well.

Bulls Say:

Partnerships with legacy PBX vendors give RingCentral access to a significant portion of the 450 million on-premises users, providing a powerful advantage over competitors in winning a large portion of the legacy installed base.
RingCentral is the first in its space to offer a CCaaS solution in addition to UCaaS, an offering to prove influential in winning enterprise deals again.
As an increasingly mobile workforce requires greater flexibility in business communications, RingCentral should face robust demand and have success in expanding enterprise adoption.

Company Description:

RingCentral is a unified communication as a service, or UCaaS, provider. RingCentral’s unified communications platform replaces on-premises private branch exchange (PBX) phone systems, which support voice-only desktop phones, with its cloud phone system. Beyond its flagship voice product, the company’s platform enables cloud-based integrated omnichannel communications, including voice, messaging, SMS, video meetings, conferencing, and contact center software solutions, among others. The software allows businesses to communicate and collaborate all on one platform across various device-types.

(Source: Morningstar)

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