#011 - Ring Central
RingCentral provides business communication tools for small, medium, and large businesses. RingCentral offers messaging, video, and phone solutions. Founder led with a huge TAM ahead of it.
Ring Central - (NYSE: RNG)
RingCentral provides business communication tools for small to large businesses. RingCentral offers messaging, video, and phone solutions. Founder led with a huge TAM ahead of it.
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Industry Overview
RingCentral competes in the Unified Communications as a Service (UCaaS) industry. Some other notable competitors in this industry are Zoom, Skype, Webex, Slack, Twilio, and many others. This is a rather large industry with a massive TAM. The number of estimated seats is ~400 million. RingCentral has 2 million. Legacy providers have much more but many customers are moving to cloud solutions such as RingCentral.
The industry will likely have a number of successful companies. RingCentral, Zoom, and some others will most likely be the most dominant ones. Mitesh Dhruv, current RingCentral CFO, has the following quote in a transcript that does an amazing job to summarize the industry:
“Now there’s this convergence going on where this UCaaS stack is going to be about the convergence of 2 or 3 modalities, call it messaging where Slack is leading; video where Zoom is leading. We have our phone where we started from. But I think the end game, the grand prize is going to be where all 3 modes or all 3 modalities work in tandem seamlessly anywhere at any time. And I think that’s what the customers are asking for, and that’s what at least we are striving to deliver.”
RingCentral has recently developed a video offering and therefore has products in all 3 modalities and others are developing the same 3 modalities if they don’t have it already. RingCentral likes to call this offering its “MVP” which stands for message, video, and phone.
RingCentral is used to communicate internally with coworkers and externally with customers, partners, and more.
Business Overview
RingCentral was founded in 1999 by Vlad Shmunis, co-founder and current CEO, and Vlad Vendrow, co-founder and current CTO. RingCentral was bootstrapped through 2006 and completed its IPO in 2013.
RingCentral started with solutions to power business communication via the phone and has expanded into messaging and video. RingCentral first focused on creating a cloud solution for voice and phone. RingCentral recognized the shift towards cloud solutions and developed a solution that would ride this trend.
Let’s walk through an example. If I have a small business, I need to have a phone line set up in case customers need to call me and ask questions. I would use RingCentral or any of the other companies competing in the UCaaS industry. As a small business owner, I might also need to have a messaging and video system set up in addition to the phone lines. I could use RingCentral for this as well since RingCentral does message, video, and phone.
Over the years, RingCentral has developed solutions for phone, messaging, and most recently video. RingCentral created a video solution and rolled it out in April due to the start of the COVID-19 pandemic and the shift to working remotely.
Total Addressable Market
Many estimates from transcripts, management, and other research firms believe that the number of seats in this industry is roughly ~400 million. RingCentral has ~2 million today. This is tiny. Not even 1% of the industry. Many of these seats are still managed via on-premise hardware. These customers will likely churn away and turn to more flexible cloud solutions such as RingCentral.
Even if this market isn’t a winner take all market, RingCentral has an easy path to 10x the number of seats over the long-term. If you believe RingCentral has pricing power, then revenue could increase much more than 10x due to annual price increases.
COVID-19 has likely accelerated the shift to cloud solutions because people have been working from home and can’t connect to the hardware in their offices. Contact centers, a big opportunity in this industry have shifted to working from home and possibly a mix of working from home and working in an office after COVID-19. This is a big boost to cloud solutions.
As more people work remotely, cloud solutions such as RingCentral will be a better fit than on-premise solutions for many companies.
Competitive Advantages
Economies of scale
Just like many other B2B SaaS companies and just SaaS companies in general, RingCentral benefits from economies of scale and can put more money into R&D and other LT projects to win more business and continue this flywheel.
“Look, it all starts with R&D and innovation. If you look at the dollars we put to work in innovation, it totally dwarfs the second guy down, as you’re saying. This year alone, we’ll be spending close to $150 million, $150 milion in R&D and innovation. And that drives that product road map. That innovation road map drives everything going forward from that.”
It’s hard for a startup to compete with a company that’s putting more than $150 million into new products and innovations, but Zoom has been successful in competing in this industry but took a slightly different angle.
RingCentral won’t be immune from competitive threats, but RingCentral likely has solid staying power due to its current size and ability to invest for the future.
Switching costs
As a business, if you use RingCentral for messaging, video, and phone, the difficulty of switching all of those systems (and potentially thousands of seats) to another company can be quite high.
Think, if you’re a business owner and you use RingCentral for your contact center, the headaches that might occur if you switch to a competitor and the effect it may have on your contact center could be very damaging for your customers if they have problems and need to reach you.
If your employees can’t communicate effectively, then how will you expect them to get any work done.
Financials
RingCentral (like many other tech businesses) seems to be avoiding profitability and instead investing in other areas such as R&D to drive long-term revenue growth and ultimately a better competitive positioning 5+ years out.
2019:
Total revenue = ~$903 million
Subscription revenue = ~$818 million
Subscription revenue growth = 33.4%
Subscription gross profit margin = 80.4%
GAAP EBIT margin = ~ -$46 million
2018:
Total revenue = ~$674 million
Subscription revenue = ~$613 million
Subscription revenue growth = 31.7%
Subscription gross profit margin = 82.1%
GAAP EBIT margin = ~ -$16 million
2017:
Total revenue = ~$504 million
Subscription revenue = ~$465 million
Subscription revenue growth = 30.5%
Subscription gross profit margin = 80.8%
GAAP EBIT margin = ~ -$5 million
What’s Interesting
Massive TAM
Management and other estimates believe there are roughly 400 million seats that RingCentral and others in the UCaaS space can capture. Some legacy players such as Avaya have more than 100 million seats and these seats will likely churn from legacy on-premise systems.
RingCentral is at 2 million seats. There’s an easy path for RingCentral to capture 20 million seats (a 10x). The industry will likely support multiple companies in this space. RingCentral, Zoom, and legacy providers will be some of the notable competitors. This industry will likely not support a winner-take-all market, meaning this is likely to remain a fragmented market with major players.
Founder-Led
Another attractive tech company led by its CEO/Co-Founder and CTO/Co-Founder. Founder-led businesses are attractive due to the massive stake in the business that the Founders own. As a large shareholder in the business, these founders are aligned with other shareholders. Founders are long-term oriented, aren’t merely trying to collect a paycheck, and their business is like their baby.
Partnerships with on-premise providers
RingCentral has developed a handful of partnerships with some of the legacy providers. The legacy providers’ customers have been looking to transition to a cloud solution. RingCentral is able to capture these customers that are churning away from on-premise solutions.
A quote from Vladimir Shmunis, CEO of RingCentral:
“…the unique ecosystem of strategic relationships give us preferential access to over 180 million users worldwide for nearly half of the on-premise PBX installed base.”
These partnerships with the legacy providers give RingCentral easy access to more customers than competitors. This could be quite the advantage for RingCentral.
Future Question
Zoom?
I’m rather bullish on Zoom. Although many investors believe Zoom is overvalued right now due to being the number 1 beneficiary of COVID, Zoom is here to stay. Zoom will be ingrained into companies due to more people working remotely. Instead of using RingCentral, Webex, or other options, more companies may just use Zoom. One day (if it doesn’t already), Zoom will offer messaging, video, and phone (MVP as RingCentral likes to call it).
If customers already have Zoom ingrained into their tech stack, why not just add phone and messaging support alongside it? More people are familiar with Zoom than RingCentral and Zoom could benefit from being a solution for regular consumers instead of as a business solution. Zoom likely benefits from network effects more than RingCentral does so this could also be a factor that benefits Zoom more than RingCentral.
Additionally, if Zoom can acquire customers for voice and messaging much cheaper due to its popular video platform, does that mean RingCentral faces headwinds?
More research on the UCaaS industry.
This is an interesting space to do some more research. I have some more companies in the UCaaS space on my watchlist and I’ll be covering them in my shallow dives over the next couple of weeks and months.
Remote work and the push for cloud solutions will drive a lot of business towards RingCentral and other “new” companies instead of legacy providers. Those are the obvious first-orders effects so what’s next? Is the push for cloud solutions the main tailwind and is it really that simple? RingCentral has 2 million seats and partnerships with companies that have more than 180 million seats. That’s an attractive growth story if it’s true. There are likely more companies that benefit from some of the trends in this industry and the shift to cloud solutions.
Conclusion
I’m likely not as bullish on RingCentral as I have been on some of my other shallow dives. I think it’s likely a great business and has obviously done well from looking at the stock price, but I’m not 100% sure where it will go from here now that Zoom is likely to stick around and be a bigger threat. Zoom will likely add similar services that RingCentral and other players already offer and may be able to do this at a cheaper all-in price than RingCentral.
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