The cloud communications company raised its full-year earnings and free-cash-flow forecasts and said customers using its paid AI products account for more than $400 million of annual recurring revenue. A one-time tax benefit pushed reported earnings to $6.50 a share.
RingCentral's revenue growth is in the single digits. Its stock reaction was not.
Total revenue rose 5.9% to $676 million in the third quarter, and subscription revenue rose 6% to $653 million, above the high end of the company's guidance. Adjusted earnings were $1.33 a share, up from $1.13 a year earlier and above the $1.27 analysts expected, according to Zacks. The adjusted operating margin was 24.7%.
Reported earnings were $6.50 a share, but that figure includes a $544.9 million discrete tax benefit from releasing a valuation allowance, an accounting item rather than a sign of operating strength. Excluding it, earnings were 28 cents a share on a reported basis, up 47%.
The raise
RingCentral raised its full-year adjusted earnings forecast to $5.07 to $5.12 a share and its free-cash-flow outlook to $620 million to $630 million. It nudged up its revenue forecast to $2.65 billion to $2.66 billion from $2.64 billion to $2.65 billion. For the fourth quarter, it expects revenue of $673 million to $680 million and adjusted earnings of $1.32 to $1.37 a share.
Customers using at least one of its paid AI products now account for more than $400 million of annual recurring revenue, about 15% of the total and double a year earlier, the company said. That is the total spending of those customers, not revenue from the AI products themselves.
Shares closed down 3.6% at $79.42 on Thursday and were indicated at about $92 early Friday, up 15.8%.
Why investors paid up
The move followed the raised earnings and free-cash-flow forecasts, MarketWatch reported; the AI adoption figure may also have helped. RingCentral is valued less as a growth company than as a cash generator. The raise to the free-cash-flow forecast, and steady margin expansion, matter more to that kind of shareholder than revenue growth. The AI adoption figure offers a partial answer to the question hanging over most software companies, whether AI tools will eat into their business or add to it: a growing share of RingCentral's customer base is paying for its AI tools.
The caveat
The fourth-quarter revenue guidance is roughly flat with the third quarter, which means growth is not accelerating. Whatever investors were paying for on Friday, it was not a faster top line.
What to watch
Fourth-quarter AI adoption disclosures, free cash flow against the raised range, and any change in revenue growth in next year's outlook.