Up 60% the Last 6 Months, This Cloud Company Just Boosted Its Growth Prospects

Important new partnerships will materialize over the next few quarters.

RingCentral (NYSE:RNG) announced excellent fourth-quarter results on Monday, exceeding the symbolic $1 billion mark of annual revenue run rate one year earlier than expected. The company is profiting from the tailwinds of its unified communication-as-a-service (UCaaS) portfolio as more and more enterprises transition from legacy on-premises systems to cloud-based solutions. And this week, RingCentral announced a new partnership that should boost its revenue growth over the medium term. 

Strong revenue growth and losses

RingCentral's impressive fourth-quarter revenue growth to $253 million, up 34% year over year, was due to the broad strength of its cloud-based unified communication offering. 

Besides the usual advantages of cloud applications over legacy on-premises systems (easier implementation and maintenance), RingCentral's communication solutions consolidate voice, video, and text capabilities. In addition, the company's flagship product RingCentral Office can be integrated into applications and workflows thanks to its programmable interface. As a result, the research company Gartner positioned RingCentral as a leader for UCaaS based on its strong ability to execute and its completeness of vision.

However, because of its limited scale, RingCentral still operates at losses under generally accepted accounting principles (GAAP). During the fourth quarter, losses increased to $25.3 million compared to $5.8 million a year ago. These results are partly due to high sales and marketing expenses that still represented 49.9% of revenue. And with about 90% of its sales in the U.S., the company has yet to increase its international presence, which should demand extra marketing spending. 

Relevant partnerships should boost revenue growth

With this context, the company's strategy to team up with large established vendors makes sense: RingCentral leverages its partners' sales force to offer and deploy its competitive products.

Over the last several years, AT&T has been selling RingCentral's solutions to its enterprise customers. And in November, both companies reinforced their partnership since RingCentral became a lead provider for the telecommunications giant.

In addition, RingCentral announced in October it agreed with the legacy communication vendor Avaya to become its exclusive provider of UCaaS solutions. This deal represents a great opportunity for both companies. Avaya's revenue has been declining over the last several years, down to $2.9 billion in fiscal 2019, partly because of its lack of cloud-based products. And RingCentral just got easier access to Avaya's large pool of more than 100,000 customers that might be interested in migrating their legacy systems to a cloud-based solution. 

And this week, management announced another partnership with Atos. The systems integrator offers digital workspace services that help enterprises improve the communication of their employees, and RingCentral's unified communication solutions will become part of it. Atos' large revenue base -- $12.6 billion expected in 2019 -- and international footprint will provide RingCentral with extra growth potential and exposure to international markets. During the last quarter, Atos generated more than 75% of its revenue outside of North America. 

Looking forward

The large size of Avaya's client base and Atos' business represent significant growth opportunities for RingCentral over the next several years. But given the 60% increase in the stock price over the last six months, the upside potential has become much less important for investors. The company's lofty enterprise value-to-sales ratio of 20.2 indicates the market expects flawless long-term execution.

However, execution risks exist since these partnerships involve tailor-made solutions that require investments. 

For instance, Avaya announced it would integrate some of its legacy functionalities into RingCentral's system to ensure a smooth transition for its customers to the cloud. And the partnership with Atos entails the development of a co-branded offering. Besides, the terms and conditions of these agreements aren't disclosed and it remains to be seen whether revenue growth will translate into increased profitability over the medium term. 

Investors should keep an eye on the competition, too. Besides the threat of giant tech players such as Microsoft and Cisco Systems that also propose communication services, the high-growth video communication specialist Zoom Video Communications recently enhanced its cloud-based portfolio with a unified communications solution.