RingCentral Stock Slides After Growth Forecast Misses Analyst Estimates

There are substantial crosscurrents in RingCentral’s business. On the one hand, the company’s fourth-quarter results held up well given the softening macroeconomic conditions. While the company’s ties to the now-bankrupt communications infrastructure provider Avaya have worried the Street, the company seems to have reached a solid resolution of the issue, and the Street clearly likes the new AWS deal.

But guidance for both the first quarter and the full year fell short of Wall Street estimates, as RingCentral (ticker: RNG) works through a rough economic environment, in particular for the company’s small and medium-size customer base. And the company is working to convince investors that its improving margin story should trump the slower growth picture.

For the fourth quarter, Ring posted revenue of $525 million, up 17%, and slightly shy of the Street consensus forecast of $527 million. On an adjusted basis, the company earned 60 cents a share, one penny better than Street estimates. Non-GAAP operating margin was 14%, up 340 basis points from the year-earlier quarter. Under generally accepted accounting principles, the company lost $9.23 a share, largely due to noncash charges related to the company’s relationship with Avaya (AVYA), which this week filed for protection from creditors under chapter 11 of the federal bankruptcy code.

RingCentral CFO Sonalee Parekh noted in an interview with Barron’s that the company took a $180 million noncash charge related to its business relationship with Avaya, and another $27 million on the remaining carrying value of the company’s position in Avaya preferred stock.

RingCentral had full year revenue of $1.99 billion, up 25%. Adjusted Ebtida, or earnings before taxes, interest, depreciation and amortization, was $318 million, up 44%, while non-GAAP profits improved to $1.99 a share, from $1.34 a year ago.

For the March quarter, the company sees revenue of $503 million to $505 million, up between 14% and 15%, falling short of the Street consensus at $545 million, with non-GAAP profits of 69 to 70 cents a share, above consensus at 63 cents.

RingCentral projects full year revenue of between $2.18 billion and $2.22 billion, up 10% to 11%, again shy of the Street, which had been expecting $2.33 billion. But the company sees improving profitability—its guidance of $3.04 to $3.10 a share is ahead of consensus at $2.84 a share.

The company also announced that it signed a new 5-year $600 million credit facility with a group of banks led by Bank of America and J.P. Morgan, including a $400 million term loan and a $200 million revolving credit line. The company said the term loan will be used to retire convertible debt “if market conditions present an attractive opportunity to do so.”

Parekh said the company had “a great quarter, with solid revenue growth,” finishing with record operating margin. She also noted that Ring is projecting a full year 2023 operating margin of at least 18%—and she expects the company to exit the year with an operating margin of at least 20%, much better than investors had been anticipating.

CEO Vlad Shmunis told Barron’s that the guidance reflects the company’s view of the macroeconomic environment, “which continues to be difficult.” But he also said Ring has shifted its approach to expanding the business. “There is a renewed focus on not just any growth but profitable growth,” he says. The improved margin will come in part from the 10% reduction in force announced last quarter.

Ring chief operating officer Mo Katibeh added that the company’s position with Avaya has been strengthened, despite that company’s financial struggles and chapter 11 filing. He says Ring’s relationship with Avaya has been “extended, expanded and enhanced,” and that it is now getting better economics from the deal than it had previously. “It’s a much, much strong agreement,” he says.

Write to Eric J. Savitz at eric.savitz@barrons.com