RingCentral 's Most Resilient Enterprise Segment Gives In To Demand Weakness, Analysts Flag Post Q4 Disappointment

Raymond James analyst Brian Peterson maintained RingCentral Inc RNG with a Strong Buy and lowered the price target from $75 to $62.

The 4Q revenue of $524.7 million (+17% Y/Y; +19% CC) fell modestly below Peterson's $526.9 million estimate and consensus of $527.4M. Subscription revenue grew 19% Y/Y (+21% CC) to $501.6 million, slightly missing the analyst's $505.0 million (consensus of $504.3 million).

The 4Q22 results reflected a softening demand environment and decelerating growth across each customer segment. Even the resilient enterprise segment fell to 21% growth. 

Enterprise ARR remained the relative bright spot at +21% (including multiple 7-figure deals), although sales cycles and deal sizes remained under pressure. 

Management believes the revised Avaya partnership will provide a better ramp toward the ACO partnership. RingCentral also announced a partnership with Amazon.Com Inc AMZN AWS while referencing continued Q/Q growth with Mitel.

The demand weakness manifested in an 11% subscription revenue growth outlook well below the street. However, this could prove conservative, with the 1Q outlook calling for 14-15% growth and easier comps throughout the year. 

While FCF has been volatile, management indicated that "normalized" FCF could double by 2024, suggesting that FCF could reach ~$300 million in 2024. The analyst believed that the dynamic could provide a path to value creation for RNG, while investors may question the balance of growth and profitability in that FCF algorithm.

Needham analyst Ryan Koontz reiterated a Hold rating pending greater confidence that subscription growth has bottomed.

Koontz saw the company adopting to the new market demands for higher profitability and cash flow as it arranged $600 million in new debt to refinance $1.6 billion due in '25 and '26. 

The analyst's C23 revenue estimate drops (-4%) but EPS increases by +$0.19. 

Price Action: RNG shares traded lower by 19.50% at $38.97 on the last check Thursday.