RingCentral, Inc. (RNG) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

RingCentral's earnings call and Q&A reveal strong financial performance, substantial AI-driven product growth, and sustainable free cash flow. The company maintains prudent guidance, reflecting a balance of growth and profitability. Strategic partnerships and capital allocation plans bolster confidence. Despite some management ambiguities, the overall sentiment is positive, expecting a 2-8% stock price increase.

Key Financial Performance

Total Revenue $620 million, up 5% year-over-year. Growth driven by strong execution in core business and momentum in new product portfolio, including AI Receptionist, RingCentral Conversational Intelligence, and RingCX Cloud Contact Center.

Subscription Revenue $600 million, up 6% year-over-year. Growth attributed to strong execution of AI-led multiproduct strategy.

Annual Recurring Revenue (ARR) Approximately $2.6 billion, up 7% year-over-year. Growth driven by small business customers and global service providers (GSPs) with above-market growth and healthy unit economics.

Subscription Gross Margin Over 80.5%, stable year-over-year.

Operating Margin 22.6%, up 160 basis points year-over-year. Improvement due to spending discipline and operational efficiencies.

Non-GAAP EPS $1.06 per diluted share, up 16% year-over-year. Driven by margin expansion and cost discipline.

Free Cash Flow $144 million, up 33% year-over-year. Growth driven by efficiency and working capital optimization.

Free Cash Flow Per Share $1.57 per diluted share, up 37% year-over-year. Reflects strong free cash flow generation.

Stock-Based Compensation (SBC) Reduced by 450 basis points year-over-year as a percent of revenue. Net new grants down 45% in the first half of the year.

Net Debt $1.1 billion, reduced by $105 million in the quarter. Net leverage at 1.8x.

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Operating Highlights

AI-first products: RingCX, RingSense, and AI Receptionist (AIR) are contributing meaningfully to ARR growth. The company is on track to meet a $100 million ARR goal for new products this year.

AI Receptionist (AIR): Adopted by over 3,000 customers, tripling since the last report. New capabilities include integration with third-party telephony systems, appointment booking, and support for multiple languages.

RingSense: Used by over 3,600 customers, up from 2,800 last quarter. It improves business outcomes through AI-driven insights and automation.

RingCX: Surpassed 1,200 customers, with half of $1 million-plus TCV deals including RingCX. Offers AI-powered customer engagement and operational efficiencies.

Partnership with AT&T: AT&T expanded its portfolio to include RingCentral's AI-first products, RingSense and RingCX, enhancing customer engagement through AI technologies.

Partnership with NiCE: Extended partnership to continue offering integrated AI-powered cloud telephony and contact center solutions.

Global Service Providers (GSPs): Strong momentum with GSPs, including marquee wins like Ryanair and a top 10 European bank.

Financial Performance: Q2 revenue grew 5% YoY to $620 million. Achieved positive GAAP operating and net income for the first time in company history.

Cost Management: Reduced stock-based compensation by 450 basis points YoY and improved operating margin to 22.6%.

Free Cash Flow: Generated $144 million in free cash flow, up 33% YoY. Increased stock repurchase authorization to $500 million.

AI Investment: Investing over $250 million annually in AI innovation, with a significant portion of R&D dedicated to AI products.

Customer Focus: Targeting small businesses and golden verticals like healthcare, financial services, and retail for growth.

Microsoft Teams Integration: RingEX for Teams app is growing in double digits, with monthly active users doubling YoY.

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Risk or Challenges

Market Conditions: The company faces challenges in its traditional UCaaS and CCaaS markets, which are described as large and robust but with limited outside growth opportunities. The focus on AI-powered customer experiences is a shift to address this limitation.

Competitive Pressures: The company is investing heavily in AI and innovation to maintain its leadership in the market. However, the rapid pace of AI development and competition from other players in the AI and cloud communication space could pose risks.

Regulatory Hurdles: No explicit mention of regulatory hurdles was made, but the company operates in a highly regulated industry, which could pose compliance risks.

Supply Chain Disruptions: No explicit mention of supply chain disruptions was made in the transcript.

Economic Uncertainties: The company is focused on cost discipline and operational efficiencies, which suggests a cautious approach to potential economic uncertainties.

Strategic Execution Risks: The company is undergoing a significant transformation with a focus on AI-driven growth and new product innovation. This shift requires effective execution to ensure profitability and market acceptance of new products.

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Guidance & Outlook

Revenue Growth: Total revenue for Q3 2025 is expected to be between $631 million and $639 million, representing year-over-year growth of 4% to 5%. Subscription revenue is projected to grow 5% to 6% year-over-year, reaching $611 million to $619 million.

Profitability and Margins: Non-GAAP operating margin for Q3 2025 is expected to be approximately 22.6%, reflecting a 160 basis point improvement year-over-year. For the full year 2025, the operating margin guidance remains unchanged, but free cash flow margin is raised to 20.5%, up 50 basis points from prior guidance.

Free Cash Flow: Full-year 2025 free cash flow is now projected to be $515 million to $520 million, an increase from prior guidance. Free cash flow per share is expected to be approximately $5.54 to $5.62, up 31% year-over-year at the midpoint.

Stock-Based Compensation: Stock-based compensation for 2025 is expected to be between $285 million and $295 million, representing 11.5% of revenue, down 50 basis points from prior guidance. Annual grants are expected to be approximately $150 million or 6% of revenue.

Share Count and Buybacks: The company has reduced its share count projections for 2025 to 92.5 million to 93 million shares, down from previous guidance. The Board has increased the total buyback authorization to $500 million.

AI Product Growth: New AI-first products, including RingCX, RingSense, and AIR, are expected to contribute meaningfully to ARR growth, with a target of $100 million ARR for new products in 2025. These products are projected to comprise a significant portion of overall revenues in the coming years.

Market Expansion: RingCentral is investing over $0.25 billion annually in innovation, with a significant share dedicated to AI. The company is expanding its AI-powered customer experiences and expects strong growth in its AI-first product portfolio.

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Shareholder Return Plan

Stock Repurchase Authorization: The Board has approved an increase to the stock repurchase authorization to $500 million.

Share Repurchases in 2025: Approximately 3 million shares have been repurchased under previously authorized plans in the first half of 2025.

Capital Allocation Strategy: The company is focused on debt repayment, share buybacks, and reducing share count as part of its balanced capital allocation strategy.

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Key Q&A

Q:Can you provide additional details on how the renewed agreement with NiCE compares to the legacy arrangement?

A:The renewed agreement is an extension of the original one, which has been in place for over six years. The original agreement never expired, and the partnership has been successful, especially in higher-end enterprises. The integration between RingCentral and NiCE inContact remains unique in the industry, combining UCaaS and CCaaS capabilities. The renewed agreement dispels any rumors about the partnership ending and ensures a long runway ahead for this collaboration.

Q:What is driving new product traction at RingCentral?

A:New product traction is driven by strong demand and RingCentral's leadership in business telephony. The company is leveraging AI in workflows, including AI Receptionist, conversational analytics, and IVA. RingCentral's position as a primary communication platform allows it to integrate AI throughout the customer interaction workflow. The new products are growing double or triple digits quarter-over-quarter, and this is just the beginning of their AI initiatives.

Q:How sustainable is RingCentral's free cash flow generation?

A:Free cash flow has increased 5x over the past three years, from $100 million to $500 million. The sustainability is supported by operating leverage, strong gross margins, cost discipline, and working capital efficiencies. The company has also taken steps to reduce SBC and improve share count through buybacks. The free cash flow guide for the year is over $550 million, a 30% year-over-year increase, indicating a strong foundation for sustained growth.

Q:What internal changes have been made to reduce SBC expenses?

A:SBC as a percentage of revenue has been reduced from 20% to about 11%. The company remains disciplined in net new grants, which are now around $150 million or 6% of revenue. Over time, as older grants roll off, the SBC run rate will reflect the new grant activity. Stock grants remain a key tool for employee incentives, but the company is focused on aligning employee and shareholder interests while maintaining cost discipline.

Q:Why was the full-year revenue guide kept flat despite upside in Q2 revenue?

A:The full-year revenue guide was kept flat due to a consistent and prudent approach to guidance based on visibility and known factors. While Q2 was strong, the company balanced growth drivers like SMB and GSB double-digit growth and enterprise wins with a cautious outlook. The guidance reflects a focus on maintaining strong fundamentals while raising free cash flow and operating margins.

Q:How will RingCentral go to market with RingCX and differentiate it from NiCE?

A:RingCX and NiCE are aimed at different audiences. NiCE inContact is a high-end enterprise product with no seat limits and best-in-class capabilities, suitable for complex use cases. RingCX is designed for smaller, simpler use cases, with more logos but lower average agent counts. The two products are expected to coexist, with RingCX being more self-serve and AI-native, while NiCE inContact addresses high-end enterprise needs.

Q:What is the framework for managing growth versus profitability at RingCentral?

A:RingCentral aims to sustain growth while expanding profitability. Growth drivers include leadership in UCaaS, double-digit growth in SMB and GSPs, enterprise wins, and traction in new AI products. Profitability will be driven by operating leverage, cost discipline, and a focus on free cash flow per share. The company is committed to balancing growth and profitability to maximize shareholder value.

Q:What is the size of deals through the Microsoft partnership, and how is the integration performing?

A:The Microsoft Teams integration is aimed at larger enterprises and is a strong double-digit growth area. Half of RingCentral's enterprise deals include this integration, which is a significant differentiator. The embedded client makes it seamless for Teams users to leverage RingCentral's advanced capabilities, enhancing the overall value proposition.

Q:What is RingCentral's capital allocation strategy going forward?

A:RingCentral plans to use its over $500 million in free cash flow for deleveraging the balance sheet, stock buybacks, innovation investments, and opportunistic M&A. The company has already paid down $100 million in debt, improved its net leverage to under 2x, and increased its stock buyback authorization to $500 million. Investments in R&D and new products will also be a priority.

Q:Do the NiCE and AT&T extensions signal a strategic shift in RingCentral's go-to-market strategy?

A:The extensions do not signify a strategic shift but rather a continuation and strengthening of existing partnerships. The NiCE extension reaffirms the strategic relationship and the value of the combined UC/CC offering. The AT&T extension is significant as it includes newer products and aligns with AT&T's focus on SMB, leveraging RingCentral's strengths in this area.

Q:How is AIR adoption performing across different customer segments?

A:AIR adoption is strong, with customers increasing from 1,000 to 3,000 in a short period. Both small and large customers are adopting AIR, with use cases ranging from routing calls to providing digital receptionists. The product is easy to implement, requires no IT expertise, and delivers cost savings, better customer experiences, and increased monetization opportunities.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the size of deals through the Microsoft partnership and the exact assumptions behind the full-year revenue guide. Additionally, they did not clarify AT&T's go-to-market strategy for RingCentral products, leaving some ambiguity around how these partnerships will be operationalized.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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